Consideration paid for surrender of lease — VAT charged on consideration — English law providing that surrender excluded from VAT land transaction exemption — Whether provision contrary to European law — VAT Tribunal making reference to European Court of Justice for preliminary ruling — ECJ ruling that surrender came within scope of European VAT exemption for letting of immovable property — Member states not allowed to make further exclusions from scope of exemption
In 1971 Lubbock Fine & Co (“LF”), a firm of chartered accountants, took a lease of premises belonging to Esso Pension Trust Ltd for 25 years and one-quarter. The premises were subsequently sold to Guildhall Properties Ltd (“GP”). In 1990 GP and LF entered into an agreement under which LF surrender the residue of the lease and returned the premises to GP with effect from June 1 1990. GP paid LF £850,000 by way of consideration for the surrender.
The Commissioners of Customs & Excise took the view that under the Value Added Tax Act 1983 VAT was chargeable on the consideration and accordingly made an assessment upon LF in the sum of £110,869.56. Item 1 of Group 1 of Schedule 6 to the 1983 Act exempted from VAT “the grant of any interest in or right over land or of any license to occupy land”. However, the surrender of a lease to the tenant’s immediate landlord was excluded from the exemption. LF argued that the exclusion of a surrender from the scope of the exemption was contrary to article 13B of the Sixth Council Directive of May 17 1977 (77/388) on the harmonisation of the law of Member States relating to turnover taxes: Common System of VAT: Uniform basis of assessment (OJ 1977 L145, p1). The VAT Tribunal stayed appeal proceedings and made reference to the European Court of Justice for a preliminary ruling.
Held The surrender of a lease came within the scope of the VAT exemption under European law and could not be excluded.
1. Where a given transaction such as the letting of immovable property, which would be taxed on the basis of the rents paid, fell within the scope of an exemption provided for by the Sixth Directive, a change in the contractual relationship, such as termination of the lease for consideration, must also be regarded as falling within the scope of that exemption. Consequently, the term “letting of immovable property” used in the Sixth Directive to define an exempt transaction covered the case where a tenant surrendered his lease and returned the property to his immediate landlord.
2. Article 13B allowed Member States to exclude certain types of letting from the scope of the exemption and hence to subject them to tax. However, it could not be construed as allowing them to tax a transaction terminating a lease where the grant of that lease was compulsorily exempt. The relations created by a lease could not be broken up in that way. Therefore, article 13B(b), which allowed member states to apply further exclusions to the scope of the exemption for the letting of immovable property, did not authorize them to tax the consideration paid by one party to the other in connection with the surrender of the lease where the rent paid under the lease was exempt from VAT.
David Goy QC appeared for Lubbock Fine & Co; John E Collins, Assistant Treasury Solicitor, acting as agent, and AWH Charles, barrister, appeared for the UK Government; Fokionas P Georgakopoulos, Member of the State Legal Services, acting as agent, appeared for the Greek Government; Thomas F Cusack, legal adviser, acting as agent, appeared for the Commission of European Communities.