VALUE ADDED TAX – sale and leaseback - the Appellant sold a number of freehold and leasehold properties to an independent third party who leased them back to the Appellant - the assignments of some shorter leases to the third party required the consents of the landlords - in the absence of such consents the Appellant assigned to the third party the economic benefits and burdens of these leases - the Appellant remained in occupation of the premises and paid a fee to the third party which was similar to the rent which would have been charged under a formal lease back - whether the supply by the third party to the Appellant in return for the fee was an exempt supply of the leasing or letting of immovable property – no – or whether the fee paid by the Appellant to the third party was for agency and property management services – yes partly and partly to enable the third party to pay the rent due from the Appellant to its landlord – before and after the transfer the Appellant underlet some shorter leasehold properties and transferred to the third party the right to receive the rents from the under tenants – whether those rents “accrued” to the third party so that the exempt supplies to the under tenants were then made by the third party – yes –or whether the exempt supplies to the under tenants were made by the Appellant and the rents paid to the third party represented consideration for standard-rated supplies of agency and property management services made by the third party to the Appellant – no - appeal allowed in part – EC Sixth Council Directive (77/388/EEC) Art 13B(b); VATA 1994 Sch 10 para 8(1)

LONDON TRIBUNAL CENTRE

ABBEY NATIONAL PLC
Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

Tribunal:DR NUALA BRICE (Chairman)

MRS L M SALISBURY

Sitting in public in London on 5-7 May 2004

David Goy QC with Claire Simpson of Counsel, instructed by Peter Mason, the Appellant’s Head of VAT, for the Appellant

Kenneth Parker QC with Timothy Ward of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

1

DECISION

The appeal

1.Abbey National Plc (the Appellant) appeals against two decisions of Customs and Excise both contained in a letter dated 7 March 2003. The first decision was that, after the Appellant had assigned all the economic benefits and burdens of some leases to a third party, remaining in occupation of the premises and paying a fee (called a principal fee) to that third party, the supply by the third party to the Appellant was not an exempt supply of the leasing or letting of immovable property but a standard-rated supply of agency and property management services. The second decision was that, after the Appellant had transferred to the third party the benefit of some under leases granted by the Appellant, the rents due to the Appellant from the under tenants remained the property of the Appellant and, when paid by the under tenants to the third party as provided by the transfer, were consideration for standard-rated supplies of agency and property management services made by the third party to the Appellant.

2.We were informed that the amount of tax at issue in the appeal was in the region of £400,000 for each year after December 2000.

The legislation

3.Article 13B of the Sixth Council Directive (77/388/EEC) provides that Member States shall exempt … :

“(b)the leasing or letting of immovable property …”

4.Section 51 of the Value Added Tax Act 1994 (the 1994 Act) provides that Schedule 10 shall have effect with respect to buildings and land. Paragraph 8(1) of Schedule 10 provides:

“8(1)Where the benefit of the consideration for the grant of an interest in, right over or licence to occupy land accrues to a person but that person is not the person making the grant-

(a)the person to whom the benefit accrues shall for the purposes of this Act be treated as the person making the grant; … .”

The issues

5. The Appellant is a well-known high street bank and makes mostly exempt supplies. It is therefore only able to recover as input tax a small proportion of the tax it pays on supplies made to it. The issues in the appeal relate to the question as to whether the Appellant received standard-rated supplies of agency and property management services (as argued by Customs and Excise) or (in one case) exempt supplies of the leasing or letting of immovable property and (in the other case) no supplies at all (as argued by the Appellant).

6. In 2000 the Appellant wished to sell a number of freehold and leasehold properties to an independent third party who would lease them back to the Appellant. The assignments of some of the leases required the consents of the landlords. In the absence of such consents the Appellant assigned to the third party (in what was called a virtual assignment) all the economic benefits and burdens of those leases. The Appellant remained in occupation of the properties and paid a principal fee to the third party of an amount which was similar to the rent which would have been charged if a formal lease back of the premises had been made by the third party to the Appellant. Under the virtual assignment it was agreed that the third party would pay the rents due form the Appellant to the landlords.

7. The first supply in dispute concerns the supply made to the Appellant by the third party in return for the principal fee. The Appellant argued that the principal fee was consideration for the Appellant’s continuing occupation of the properties and so the supplies made to it by the third party were supplies of “the leasing or letting of immovable property” within the meaning of Article 13B(b) and so were exempt supplies. Customs and Excise argued that the Appellant’s right of occupation derived from the leases themselves and so the principal fee paid by the Appellant to the third party was paid for supplies of agency and property management services which were standard-rated supplies.

8. The second supply in dispute concerns the rents of the underlet properties. Before and after the virtual assignment the Appellant granted under leases of some of the properties and by the virtual assignment assigned to the third party the right to receive the rents. The rents were then paid by the under tenants to the third party. The Appellant argued that the rents “accrued” to the third party within the meaning of paragraph 8(1) of Schedule 10 and so the third party was to be treated as the person who had granted the under leases with the result that the rents received by the third party were consideration for the making of exempt supplies by the third party to the under tenants. Customs and Excise argued that the Appellant retained the right to receive the rents from the under tenants and so it was the Appellant who made exempt supplies to the under tenants and when the rents were paid to the third party they constituted consideration paid by the Appellant to the third party in return for standard-rated supplies of agency and property management services.

9.Thus the issues for determination in the appeal were:

(1)whether under the virtual assignment the supply by the third party to the Appellant was an exempt supply to the Appellant of the leasing or letting of immovable property within the meaning of Article 13B(b) (as argued by the Appellant) or whether the principal fee was paid for standard-rated supplies of agency and property management services (as argued by Customs and Excise); and

(2)whether under the virtual assignment the rents of the under leases “accrued” to the third party within the meaning of paragraph 8(1) of Schedule 10 so that the third party was to be treated as the person who made the exempt supplies to the under tenants (as argued by the Appellant) or whether the rents of the under leases belonged to the Appellant and when paid by the under tenants to the third party constituted consideration paid by the Appellant for standard-rated supplies of agency and property management services (as argued by Customs and Excise).

The evidence

10.Three bundles of documents were produced and a fourth bundle which contained witness statements. Oral evidence was given on behalf of the Appellant by Mr Russell Joseph Deyell, who was, at the relevant time, the Appellant’s Finance Project Manager responsible for the sale and leaseback; Mr Nicholas Guy Roberts, the Partnership Development Manager for the Appellant’s property management division; and Mr Shafqat Malik FCCA AMCT the Financial Controller of Mapeley Limited.

The facts

11.From the evidence before us we find the following facts.

The sale and lease back

12.For the purposes of its business the Appellant came to own a large number of properties both freehold and leasehold. By the late 1990’s the Appellant owned approximately 1,000 such properties of which about half were freehold and half leasehold. Some of the freeholds were very valuable and some of the leaseholds were virtually worthless tenancies of shop-like premises occupied by the Appellant’s branches. We saw a typical lease dated 23 December 1993 under which a landlord leased to the Appellant certain premises for the term of twenty-five years. The lease contained a covenant by the Appellant with the landlord “not to mortgage charge assign transfer underlet or part with the whole or underlet the whole or part of the demised premises without the consent of the landlord such consent not to be unreasonably withheld.” The lease also contained a provision that if there were any breach of the covenants on the part of the Appellant the landlord could re-enter the demised premises and the term should cease.

13.In early 2000 the Appellant considered a sale and leaseback arrangement under which it would sell most of its property portfolio (freeholds and leaseholds) to a third party who would then lease back to the Appellant such of the premises as the Appellant wished to occupy. The commercial advantages of such an arrangement for the Appellant were: that it released capital which could be invested elsewhere in the business; that it transferred the property risk to a third party; and that it aligned the Appellant’s property liability more closely with its business needs because it permitted the Appellant to vacate leasehold property which was surplus to its needs before the term of the lease expired. It was also intended that, after the transfer of the properties, the new owner would manage the whole portfolio. Negotiations were held with a number of parties and ultimately agreement was reached with Mapeley Columbus Limited (Mapeley).

14.There was no difficulty in the Appellant transferring the freehold properties to Mapeley nor was there any difficulty in the Appellant assigning its long leasehold interests to Mapeley where there was no requirement to obtain the consent of the landlord to such assignment. However, two difficulties arose in respect of those shorter leases where the consent of the landlord to the assignment was required. First, a number of such consents was required and they would take more time to obtain than was available. Secondly, it was thought to be unlikely that the landlords would consent to assignments to Mapeley which was a new company without a track record of financial strength. In order to overcome these difficulties the concept of a virtual assignment was developed. Under such a virtual assignment the Appellant would transfer all the economic benefits and burdens of the shorter leases to Mapeley and the Appellant would remain in occupation of the premises and would pay a principal fee to Mapeley which was similar to the rent it would have paid if there had been a formal lease back. Most of the shorter leasehold properties were the subject of the virtual assignment.

15.The legal position of the Appellant and Mapeley was regulated by a Master Agreement dated 18 October 2000.

The Master Agreement

16.Under the Master Agreement, in return for the consideration of £457,250,000, the Appellant agreed to sell its properties (freehold and leasehold) to Mapeley and in return Mapeley agreed to grant to the Appellant leases for such of the properties as the Appellant wished to occupy, for such terms as the Appellant wished, and at a current market rent which escalated every six months by a fixed percentage (3% per annum). We call this the indexed rent. Of the total consideration a nominal £1 was paid for each lease. The Master Agreement commenced on 25 December 2000 and was for a term of twenty years. The following clauses of the Master Agreement are relevant:

Clause 4 provided that the Appellant agreed to sell and Mapeley agreed to buy the transferred properties. On the completion date the Appellant would transfer the freehold properties and would assign the leasehold properties to Mapeley. If, for any reason, an assignment were not completed on the completion date, then the Appellant would execute a virtual assignment pending completion of the lawful assignment of that property to Mapeley.

Clause 8 provided that Mapeley agreed to grant leases of the transferred properties to the Appellant each for a term which was the lesser of (a) a period expiring on the Hold Date for those premises or (b), in the case of a property with a lease from a landlord, the remaining term of that lease less three days. The Hold Date was the date upon which the Appellant wished to cease to occupy the property. There was a separate Hold Date for each property which was stated in Schedule 10 of the Master Agreement.

Schedule 10 was divided into three parts. Part I listed the freehold properties the subject of the Master Agreement. Part II listed the long leasehold properties where the consent of the landlord to assign or underlet was not required. Part III listed properties where the landlord’s consent to assign or underlet was required. It excluded vacant properties. In respect of each property a different Hold Date was specified.

Clause 8.4 provided that, in relation to properties mentioned in Schedule 10 Part III, the Appellant would occupy the premises pursuant to the virtual assignment until such time as the assignments were completed.

Clause 8.7 provided that the standard occupancy regulations (as set out in Schedule 11) should be the occupancy regulations for the purposes of the leases by Mapeley to the Appellant and to the occupancy of the premises the subject of the virtual assignments. However, if the Appellant was in occupation of the premises then the Abbey National occupancy regulations (as set out in Schedule 12) applied.

Schedule 11 contained the standard occupancy regulations which applied where the Appellant was not in occupation of the premises. These regulations contained obligations by the tenant to pay rent and outgoings and other obligations similar to the tenant’s covenants normally contained in a lease (for example, the Appellant had to have the consent of Mapeley before carrying out alterations). The standard occupancy regulations also contained obligations on the part of Mapeley (called the landlord) which were similar to the landlord’s covenants normally contained in a lease. Appendix 1 of Schedule 11 contained the provisions for increasing the rents or the principal fees.

Schedule 12 contained the Abbey National occupancy regulations which applied if the Appellant was in occupation of a property. They were similar to the standard occupancy regulations with some changes; for example, under these regulations the Appellant could carry out alterations after giving notice to Mapeley.

Clause 8.16 provided that, in respect of vacant properties, the Appellant was a licensee of Mapeley and for a period of twelve months was obliged to pay a licence fee to Mapeley. However, clause 8.17 provided that Mapeley was at liberty during that twelve month period to let, underlet or otherwise deal with the vacant properties and any rent or other monies receivable by Mapeley from a third party in that period belonged to Mapeley absolutely.

Clauses 11 to 22 provided that Mapeleywould provide estate property management services to the Appellant including lease renewals and the collection of payments of rent.

Clause 11 provided that Mapeley should retain the services of Nelson Bakewell (who had previously provided estate property management services to the Appellant) for the purpose of the performance of the estate management services mentioned in the agreement. A summary of estate management standards was set out in Schedule 14 and those standards applied to all of the properties the underject of the Master Agreement, including freehold and long leasehold properties as well as those the subject of the virtual assignment.

Clause 16 provided that Mapeley covenanted with the Appellant that where any lease from a landlord was due to expire before the Hold Date then Mapeley would use its best endeavours to obtain a new lease in its name on terms that Mapeley could then grant a lease to the Appellant.