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Abbey National plc v Customs and Excise Comrs

[2006] EWCA Civ 886, [2006] NLJR 1100, [2006] 27 EG 235 (CS), 150 Sol Jo LB 892, [2006] SWTI 1817, [2006] All ER (D) 336 (Jun)

Court: CA

Judgment Date: 29/06/2006

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Catchwords & Digest


VALUE ADDED TAX - EXEMPTIONS - LAND - GRANT OF RIGHT OVER OR LICENCE TO OCCUPY LAND - COMPANY OWNING LARGE NUMBER OF PROPERTIES - COMPANY OCCUPYING CERTAIN PROPERTIES AND LEASING OTHERS TO SUBTENANTS - COMPANY TRANSFERRING BENEFITS AND BURDENS OF PROPERTIES TO THIRD PARTY BY 'VIRTUAL TRANSFER' - COMPANY PAYING FEE TO THIRD PARTY INSTEAD OF RENT IN RESPECT OF PROPERTIES OCCUPIED BY COMPANY - SUBTENANTS PAYING RENTS WHICH WERE FORMERLY PAYABLE TO COMPANY TO THIRD PARTY - WHETHER 'VIRTUAL TRANSFER' HAVING SAME EFFECT FOR VAT PURPOSES AS IF ACTUAL TRANSFER HAD TAKEN PLACE - EC COUNCIL DIRECTIVE 77/388, ART 13B(B)

Abbey owned approximately 1,000 leasehold and freehold properties, some of which it occupied for the purpose of its business. The leases contained the usual covenant not to transfer or sublet without the consent of the landlord. In 2000 Abbey agreed to sell its property portfolio to a company, M Ltd, and to lease back those properties which it wished to occupy. After the sale it was intended that the new owner would manage Abbey's portfolio. In the case of some of the shorter leases the consent of the landlord might take too long to obtain or might not be forthcoming. Therefore, to avoid delay, Abbey transferred some of the shorter leases to M Ltd by a 'virtual assignment' whereby it transferred all the economic benefits and burdens of the leases to M Ltd and Abbey, in some cases, remained in occupation of the premises, paying a principal fee to M Ltd similar to the rent it would have paid if there had been a formal lease back. Where Abbey had sublet the premises, Abbey and M Ltd entered into a virtual assignment whereby Abbey held the benefit of each sub-lease in trust for M Ltd. Among M Ltd's rights under the virtual assignment, M Ltd was entitled to receive rent from the underlessees. The commissioners decided that neither in the case of a virtual leaseback by M Ltd to Abbey, nor in the case of rent paid by underlessees to M Ltd, was there an exempt supply consisting of the 'leasing or letting of immovable property' within the meaning of art 13B(b)1 of Council Directive (EC) 77/388, but rather a standard rated supply of agency and property management services. Abbey appealed. The tribunal dismissed Abbey's appeal in relation to the 'principal fee' paid by Abbey to M Ltd, but it allowed Abbey's appeal in relation to the rent paid by the underlessees to M Ltd. Abbey appealed and the commissioners cross-appealed. Abbey contended that there should not be a different VAT treatment where, as between Abbey and M Ltd, an identical economic effect had been achieved by the mechanism of the virtual assignment as there would have been had there been a formal assignment. The commissioners contended that the effect of the virtual assignment was to give neither a legal nor an equitable interest to M Ltd and accordingly Abbey remained the legal and equitable lessee. Since Abbey had conferred no right to occupy on M Ltd, M Ltd could not have made a supply of letting of the property back to Abbey, nor could M Ltd make a supply of 'letting' to the subtenants. It was common ground that the contractual arrangements did not involve the transfer of any proprietary interest in the properties in question from Abbey to M Ltd, whether at law or in equity. In consequence, Abbey's status as a tenant remained the same after as before the execution of the virtual assignment. Abbey appealed successfully to the High Court against the tribunal's dismissal of its appeal against the decision of the commissioners that the supply was not an exempt supply for VAT purposes since it did not constitute 'the leasing or letting of immovable property'. The commissioners appealed with leave permission of a single Lord Justice.
The issue for the court was whether a contractual arrangement relating to real property which, under domestic law, fell short and was intended to fall short of being a transaction of leasing or letting was nevertheless to be treated as if it were such a transaction for VAT purposes, with the consequence that it was an exempt supply.
Held - The appeal would be allowed. 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 art 13B(b). That article could not include a situation where no right of occupation was in fact granted. In the instant case, as M Ltd acquired no right of occupation of the properties the subject of the virtual assignment, and hence was never in a position to transfer such a right back to Abbey, the supply made by M Ltd to Abbey under the contractual arrangements was not a supply of 'leasing or letting' within the meaning of Art 13B(b) and hence was not exempt from VAT. It followed that the commissioners were correct in characterising the supply by M Ltd as a standard-rated supply of agency and property management services and that the tribunal had reached the right decision on the Art 13B(b) issue and did so for the right reasons.