Abbey National Plc v Customs and Excise

For VAT purposes, the expression “leasing or letting of immovable property” has an autonomous Community-law meaning and must be construed strictly by reference to the essential features of the transaction. A functional approach is required. A transaction may constitute a letting even where no legal estate or right of occupation is transferred, provided that the contractual rights reproduce the essential economic features of a letting. Where parties create equivalent economic arrangements through a virtual assignment and occupation agreement, the VAT treatment should not differ merely because national property law attributes occupation to an existing lease. Statutory rules treating the person benefiting from consideration as the person making the grant apply where a clear trust of the benefit of sublease rents has been created.

Abbey National plc appealed against a VAT and Duties Tribunal decision concerning a sale and leaseback arrangement with Mapeley Columbus Ltd. Because consents were required for assignments of certain short leases, the parties used virtual assignments which transferred the economic benefits and burdens of the leases while leaving legal title with Abbey.

The Tribunal held that Mapeley’s supply to Abbey was a standard-rated supply of agency and property-management services, not an exempt letting. It also held that rents under subleases were not consideration for supplies made by Mapeley. Abbey appealed on the first issue, and the Commissioners cross-appealed on the second. The central question was whether the virtual arrangements had the same VAT treatment as actual assignments and leasebacks.

Appeal allowed; cross-appeal dismissed.

1. Meaning of letting. Article 13B(b) of the Sixth Council Directive has an autonomous Community-law meaning. The exemption must be construed strictly, but its scope is not determined by national property-law concepts. The essential features of the transaction must be identified by a functional approach.
2. Virtual assignment. The rights transferred to Mapeley included the right to the leases, the rents from underlessees, payments connected with Abbey’s occupation, and extensive powers to deal with the properties as owner. That carefully constructed bundle reproduced the essential features of a legal assignment and was to be treated as equivalent to one for the purposes of the Directive.
3. Virtual leaseback. A letting may exist even where the recipient obtains no legal estate or independent right of occupation. The relevant relationship is that between the parties to the supply. Under the virtual assignment, Abbey occupied the premises pursuant to its agreement with Mapeley and paid the Principal Fee for that arrangement. The fact that, under national law, Abbey’s occupation could also be attributed to its existing lease did not alter the essential nature of Mapeley’s supply.
4. The Tribunal was therefore wrong to treat the Principal Fee partly as consideration for the landlord’s supply and partly as payment for agency and management services. The supply by Mapeley to Abbey was an exempt letting.
5. Sublease rents. Paragraph 8(1) of Schedule 10 to the Value Added Tax Act 1994 applied to the clear declaration that Abbey held the benefit of the subleases in trust for Mapeley. The provision treats the person to whom the benefit of consideration accrues as the person making the grant, even though legal title and the physical making of the supply may remain with another. That statutory treatment did not contradict the Directive’s general principle that VAT liability attaches to the supplier.
6. A reference to the European Court of Justice was inappropriate because the remaining difficulty concerned applying the Directive to a complex arrangement created by national law, rather than interpreting the Directive.

• VAT & Duties Tribunal: decision released on 21 June 2004. The Tribunal upheld the Commissioners’ first decision but rejected their second decision.
• High Court (Chancery Division): appeal allowed and cross-appeal dismissed.