Revenue and Customs v Abbey National Plc

For the exemption for leasing or letting of immovable property under Article 13B(b), the supplier must confer an essential right of occupation. The tenant must be entitled, for an agreed period and payment, to occupy the property as if owner and to exclude others.

A contractual arrangement which leaves the existing tenant as the sole holder of that right, but regulates its exercise between the parties, is not an exempt letting. Similar commercial effects and VAT neutrality cannot expand the strictly construed exemption. The supply is instead taxable as agency and property-management services.

Abbey National entered a sale-and-leaseback arrangement with Mapeley. For leasehold properties which could not be assigned without the landlords’ consent, the parties used a “virtual assignment”. Abbey retained its legal and equitable leasehold position and continued to occupy the premises, while Mapeley assumed their economic benefits and burdens and managed them.

The VAT & Duties Tribunal held that Mapeley’s supply was not an exempt letting under Article 13B(b) of the Sixth Council Directive 77/388/EC. Hart J allowed Abbey’s appeal in [2005] EWHC 831 (Ch). The Commissioners appealed. The central issue was whether the virtual assignment supplied Abbey with a leasing or letting of immovable property for VAT purposes.

1. Appeal allowed unanimously. Jonathan Parker LJ, with whom Sir Peter Gibson and May LJ agreed, held that the Tribunal had correctly rejected the claimed exemption and that Hart J had erred.

2. The inquiry under Article 13B(b) of the Sixth Council Directive 77/388/EC proceeded in two stages. The court first had to identify, under national law, the nature and effect of the parties’ contractual arrangements. It then had to decide whether that arrangement fell within the autonomous Community-law meaning of leasing or letting. Community law could not supply a right of occupation which did not exist under national law.

3. The virtual assignment transferred neither a proprietary nor a contractual right of occupation to Mapeley. Abbey remained tenant and occupied under its existing leases. Mapeley therefore could not grant, or lease back, a right of occupation to Abbey. The arrangement regulated Abbey’s continuing occupation as between Abbey and Mapeley, rather than conferring that occupation on Abbey.

4. The European authorities established that leasing or letting under Article 13B(b) has as its essential and fundamental characteristic the grant, for payment and an agreed duration, of a right to occupy property as if owner and to exclude others. A right to an income stream, unaccompanied by and not derived from such a right of occupation, did not meet that characteristic.

5. VAT neutrality did not require economically similar transactions to receive identical treatment. The exemption was to be construed strictly. Since Mapeley did not supply a right of occupation, its supply to Abbey was not exempt leasing or letting, but a standard-rated supply of agency and property-management services. No preliminary reference was required because the existing European case law gave clear guidance.

• Court of Appeal (Civil Division): allowed the Commissioners’ second appeal and restored the Tribunal’s conclusion on the Article 13B(b) issue: [2006] EWCA Civ 886.
• High Court, Chancery Division: Hart J allowed Abbey’s appeal against the Tribunal on the Article 13B(b) issue and dismissed the Commissioners’ cross-appeal on the separate rent issue: [2005] EWHC 831 (Ch).
• VAT & Duties Tribunal: dismissed Abbey’s appeal on the Article 13B(b) issue, but allowed its appeal on the separate VAT treatment of rents.