Tenant assigning lease to third party – Third party undertaking to perform all obligations under lease – Tenant providing consideration – Value Added Tax and Duties Tribunal holding transaction exempt from VAT – Commissioners appealing – High Court referring question to European Court of Justice – Whether transaction exempt from VAT – Leasing or letting of immovable property – Article 13B(b) Sixth Council Directive 77/388/EEC
In 1986 Prudential Assurance Co Ltd (the landlord) granted a 15-year lease to Wako International (Europe) Ltd. In 1993 Wako entered into an agreement with Cantor Fitzgerald International (CFI), with the landlord’s consent, for an assignment of the lease to CFI. Pursuant to that agreement, CFI undertook to perform Wako’s obligations under the lease and to indemnify Wako against any losses or liabilities incurred by reason of the lease. As consideration, Wako undertook to pay CFI £1.5m (the transaction).
CFI appealed against a ruling by the Commissioners for Customs & Excise that VAT was payable on the transaction. The VAT and Duties Tribunal allowed the appeal, and held that the transaction was exempt from VAT. The commissioners appealed to the High Court. The High Court considered the case of Lubbock Fine & Co v Customs & Excise Commissioners C63/92 [1993] ECR I-6665. It questioned whether Article 13B(b) of the Sixth Council Directive 77/388/EEC should be interpreted to mean that the supply made by CFI was exempt from VAT. Article 2(1) of the Sixth Directive provided that a supply of goods or services effected for consideration was subject to VAT. Article 13B governed exemptions from VAT, and Article 13B(b) provided for “the leasing or letting of immovable property”.
The High Court stayed proceedings, and referred the matter to the European Court of Justice for a preliminary ruling on the question of whether, by virtue of Article 13B(b), a supply made by a person who did not have any interest in the immovable property should be exempt from VAT in circumstances where the person had agreed to accept an assignment of a lease of that immovable property from a lessee, and the lessee had paid that person a sum of money in return. CFI contended that Article 13B(b) exempted not only the initial letting of immovable property but also all subsequent transactions based on that letting or ancillary to it. Relying upon Lubbock Fine, it contended that Article 13B(b) did apply to changes in the lease.
Held: In light of Article 2(1), it is necessary in every case to consider which party supplied the goods or services, and which party provided the consideration. The supply of goods or services was subject to VAT, rather than the payment made by way of consideration for the supply. Consequently, it was important, in a case of this kind, for the national court to ascertain which party had made the payment and which had supplied the services. In this case an identifiable supply of services fell within the scope of Article 2(1), which was taxable unless an exemption applied. The supply of services was provided by CFI, as prospective tenant, when it agreed to accept an assignment of the lease from the lessee, as a recipient. The letting of immovable property for the purposes of Article 13B(b) essentially involved the landlord assigning to the tenant, in return for rent and for an agreed period, the right to occupy its property, and to exclude other persons from it. The supply in this case did not meet those conditions. On the contrary, it was the new tenant (CFI) that, by agreeing to take on the rights and obligations arising under the existing lease, supplied a service to the former tenant (Wako), which, in turn, paid consideration for that supply. Article 13B(b) applies to the grant of leases of property, but not to transactions that are merely based upon the lease or are ancillary to it. That did not conflict with the decision in Lubbock Fine.
The answer to the question referred, was that Article 13B(b) of the Sixth Directive did not exempt a supply of services that was made by a person with no interest in the immovable property and that consisted of the acceptance, for consideration, of an assignment of a lease of that property from the lessee.
David Goy QC (instructed by Deloitte & Touche) appeared for Cantor Fitzgerald International; Nigel Pleming QC and Philippa Whipple appeared for the United Kingdom government.
Sarah Addenbrooke, barrister