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Sale and leaseback treated as a composite transaction for input VAT recovery purposes

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The case of A Blue (UK) Ltd (TC/2019/00187) concerned a claim for a repayment of VAT of £104,123 on the purchase of a property consisting of tenanted retail units on the ground floor and two vacant floors above.

A Blue (UK) Ltd (‘ABU’) agreed in principle with the head leaseholder of the property, Panther (VAT) Properties Ltd (‘Panther’), to acquire a sub-lease of the upper floors (save for a small plant room) plus an entry way and a bin area, for a premium of £800k plus VAT.

In the process of negotiating documents, the conveyancing solicitors suggested that the transaction would be less complicated (due to a complex title structure) if ABU instead purchased Panther’s head-lease outright, subject to a carved-out right in favour of Panther in relation to the ground floor retail elements and plant room (the ‘residual property’).

This was agreed and ABU, immediately on acquisition of the head-lease, granted a sub-lease of the residual property back to Panther for a ‘peppercorn’ rent. The price paid for the head-lease on these terms was £800,000 plus VAT: the same amount as had been agreed as a premium for the acquisition of sub-lease.

ABU opted to tax, even though its intention was to develop the upper floors for residential use, and recovered the VAT incurred on the purchase of the property but HMRC viewed the lease back as a non-business activity. Using a floorspace calculation, HMRC disallowed 65% of the input tax recovered.

ABU’s representatives argued that the VAT incurred on the purchase of the head-lease was wholly attributable to taxable supplies, putting forward two alternative arguments. The first was that the acquisition of the residual property should be disregarded completely (because no value in the residual property passed to ABU). The second was that the sale of the head-lease interest in the residual property, and the grant back of a sub-lease that immediately restored all its economic benefit to Panther, meant that there was a self-cancelling barter between the parties, comprised of a pair of cross-supplies of equal value and equal VAT liability.

The First-tier Tribunal (FTT) considered that whilst the conveyancing mechanics made unignorably clear that the ownership of the head-lease of the residual property had passed to ABU, it was still equally obvious that the economic benefit had never really left Panther’s hands. So to find a middle ground, it co-opted the CJEU decision in Mydibel SA v Belgium (Case C-201/18), in which it was decided that a sale and immediate leaseback undertaken only to raise finance were so closely linked that they formed one single supply that it would be artificial to split. The FTT saw ABU’s circumstances as analogous to Mydibel’s:

‘I have concluded, in agreement with the Appellant, that the purchase of the head-lease and the immediate grant of the sub-lease to Panther are so inextricably linked – both by commercial intention and by the contractual documents – that the two transactions should be considered as effectively one transaction.

'Looking at the purchase of the head lease, and the leaseback to Panther together as effectively one transaction, I consider that the £800,000 paid by the Appellant was for the purchase only of the ground floor entry way, ground floor bin area, part first floor and second floor. The acquisition of the ground floor and part first floor was negated by the immediate disposal of these commercial parts of the building via the grant of the sub-lease to Panther at a peppercorn. There was, effectively, no purchase of the ground floor and part first floor by the Appellant.’

The VAT was therefore attributable solely to the area acquired and retained by it, as it would have been under the original deal, and recoverable in full.

Julie Green, MHA MacIntyre Hudson ( Note: the author's firm represented the taxpayer in this case. 

Issue: 1543
Categories: In brief , VAT , Mydibel , sale and leaseback