The Upper (tax) Tribunal has held that a lease and leaseback arrangement designed to ensure that a University could recover VAT on construction costs was an abuse of rights and should be ignored for VAT purposes.
The case was the long-running University of Huddersfield Higher Education Corporation case, which has already been through lower tribunals and a referral to the ECJ.
The facts were straightforward. The University owned a building which it wished to redevelop and use for its general education activities. As those activities were primarily exempt supplies, the University would be unable to recover the VAT it incurred in connection with the redevelopment (which came to over £600,000).
In 1996, under a scheme proposed by its accountants, the University opted to tax its interest in the building. It granted a 20-year lease of the building to a discretionary trust formed the previous year. The trustees of the trust also opted to tax and granted a (sub-20 year) leaseback to the University. The University therefore charged VAT to the trust on the 20 year lease and the trust charged VAT on the supplies made back to the University under the leaseback. The arrangements enabled the University to reclaim the VAT (input tax) incurred in respect of the redevelopment of the building as soon as it was incurred whilst obliging it to pay VAT (output tax) on the rent payable over the term of the leaseback. The leases were surrendered in 2004.
The Upper Tribunal decided that where a tax mitigation scheme was devised to create an entitlement to deduct input tax but also generated a liability to account for output tax, it was not necessary to wait to see how much output tax was in fact accounted for before deciding whether an abusive practice has occurred. The previous tax tribunal had been wrong to focus on the collapse of the leases in 2004 as the event that had given rise to the tax advantage.
The Upper Tribunal held that there were sufficient objective factors showing that the essential aim of all the arrangements had been to obtain a tax advantage and applying relevant case law (including the Halifax abuse of rights decision) those arrangements should be regarded as an abuse. This was an artificial attempt to create a taxable supply which did not have any function other than to enable the deduction of input tax. The University had no need to enter into the lease and leaseback in order to use the building since it already had an interest entitling it to occupy the premises. Therefore, to allow the University to rely on the lease of the building to the trust as the provision of a taxable supply, which in turn allowed it to recover related input tax would be contrary to the purposes of the relevant law.
The result of this decision was that the redevelopment was to be treated as having been undertaken for the University’s general (VAT exempt) purposes and both the lease by the University to the trust and the leaseback from the trust to the University would be disregarded for VAT purposes.