Abbey National plc v Customs and Excise Comrs

[2005] EWHC 831 (Ch), [2006] STC 852, [2005] 3 EGLR 73, [2005] 43 EG 190, [2005] SWTI 906, [2005] All ER (D) 85 (May)

Court: Ch D

Judgment Date: 06/05/2005

Case History

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Catchwords & Digest


VALUE ADDED TAX - EXEMPT SUPPLY - IMMOVABLE PROPERTY - LEASING OR LETTING - VIRTUAL ASSIGNMENT OF UNDER-LEASE - GRANT OF RIGHT OF OCCUPATION - COUNCIL DIRECTIVE (EC) 77/388, ART 13B

AN plc owned a large number of leasehold and freehold properties. For commercial reasons, it transferred a number of the freehold properties to MC Ltd with a view to leasing back to AN plc those premises which it wished to occupy. It also assigned its long leasehold interests to MC Ltd where there was no requirement to obtain the landlord's consent to such assignment. However, an issue arose concerning those shorter leases, where the consent of the landlord was required, due to the fact that obtaining such consents would take time and that it was unlikely that the landlords would consent to assignments to MC Ltd which was a new company. Accordingly, AN plc transferred all the economic benefits and burdens of those leases to MC Ltd under a virtual assignment, while AN plc remained in occupation of the premises and paid a fee to MC Ltd which was similar to the rent it would have paid if there had been a formal lease back. Article 13B of the Sixth Council Directive (EC) 77/388 (on the harmonisation of the laws of the member states relating to turnover taxes--common system of value added tax: uniform basis of assessment) provided that member states would exempt the leasing or letting of immovable property. The Customs and Excise Commissioners held that the supply by MC Ltd to Abbey under the virtual assignment was not an exempt supply consisting of the leasing or letting of immovable property but a standard-rated supply of agency and property management services. By a decision of 21 June 2004 (the contested decision), the VAT and Duties Tribunal held that the commissioners had been correct in so deciding and AN plc appealed. The commissioners also found that, in cases where the economic benefit of under-leases had been transferred by AN plc to MC Ltd, the rents due to AN plc under those under-leases, when paid by the under-tenants to MC Ltd pursuant to the agreement between MC Ltd and AN plc, were consideration for standard rated supplies of agency and property management services by MC Ltd to AN plc. By the contested decision, the tribunal held that the commissioners were wrong in so deciding, preferring the argument of AN plc that the rents 'accrued' to MC Ltd for the purposes of par 8(1) of Sch 10 to the Value Added Tax Act 1994 with the result that MC Ltd was to be treated as the person who made exempt supply to the under-tenants, and the commissioners cross-appealed. It was accepted that, where an actual, as opposed to virtual, assignment had taken place with a leaseback to AN plc, the rent payable by AN plc was payable in respect of an exempt supply by MC Ltd consisting of the leasing or letting of immovable property, and that where sub-leases existed, the rent payable thereunder to MC Ltd was similarly payable in respect of an exempt supply.
The issues for determination by the court were whether a 'letting' for the purposes of the Sixth Council Directive necessarily connoted the grant of a right of occupation or whether it included also a grant of a right to enjoy the fruits of the property, and whether, on the facts of the case, the relevant right had been created.
Held - The appeal would be allowed and the cross-appeal dismissed. It was clear that the 'letting' in the Sixth Directive could include a situation where no right of occupation was in fact granted. The meaning of the expression 'the leasing or letting of immovable property' could not be determined by the interpretation given to such an expression by the law of a member state, but had an independent meaning in Community law. The expression had to be construed strictly since it constituted an exception to the general principle that VAT was to be levied on all services supplied for a consideration by a taxable person. The definition of 'leasing or letting of immovable property' might be wider than such a concept under national laws. The availability of the exemption was not, for example, dependent upon whether the right acquired as a result of a supply was a right in property or was a purely personal right as against the person making the supply. In order to determine whether a transaction comprised a letting, account would be taken of its 'essential features', which had to be identified by adopting a functional approach. As to whether the relevant right had been created in the instant case, MC Ltd acquired a bundle of rights under the virtual assignment which reflected, so far as legally possible, the effects of the legal assignment which could and should be equated with a legal assignment for the purposes of the Sixth Directive. However, having regard to the virtual leaseback side of the transaction, AN plc continued in occupation, pending the execution of a legal assignment, under its rights under the lease; MC Ltd had never itself had a right of occupation and therefore could not confer one on AN plc. In considering the nature of the supply for tax purposes, the relationship to be considered was that between the parties to the relevant supply; the relationship of either of those parties to the landlord could be ignored. The fee paid by AN plc was paid pursuant to an agreement under which, as between MC Ltd and AN plc, AN plc was occupying the property pending the completion of the assignment to MC Ltd, on which the latter could insist. The essential nature of the supply by MC Ltd to AN plc would not change on execution of the legal assignment by virtue of MC Ltd then enjoying, for a scintilla of time, a right of occupation of the premises. Accordingly, the tribunal had been wrong to hold that the fee was being paid in part in connection with the exempt supply to AN plc by the landlord and as to the balance for agency and management services provided by MC Ltd.