The wider application of Sch 10 ‘clawback’ provisions to lease back financing deals.
As you read this piece the UK may already have left the EU, though it hadn’t at the time of writing. The accepted position is that all CJEU decisions pre-dating that departure date become binding decisions at Supreme Court level. We therefore need to pay heed to the dates of decisions. The CJEU’s decision in Mydibel (Case C-201/18) makes the cut, so to speak, and would have done so by two days even had the UK left as planned on 29 March. It is therefore binding precedent.
And it has something direct to tell us about the application of the capital goods scheme (CGS) to cases where a fully taxable business creates property, and finances it through a lease and lease back scheme in which the intermediate party is a bank, and where the charges are effectively the same as would apply in a mortgage scenario. Reducing the decision to its outcome, the CJEU decided that this did not change the business’s fully taxable use of the building despite the intervening lease activities mentioned above being exempt.
Given the basis of VAT as a tax where each link in the chain of supplies is separate, as per the well-known BLP case (Case C-4/94), this could be thought surprising. It appears that the court was not happy to suspend the reality of a continuing taxable use to indulge in tax law quibbles over what was essentially a refinancing package (and no more). The key to this was that the first lease to the bank was subject inextricably to the return lease granted by the bank, such that the bank had no occupation rights whatever, and never would have. This could not be viewed as two separate supplies, but was one action (and the court even suggested it was a single supply, though of what and to whom seems a tricky point if that is to be accepted).
However, my main concern is not the impact on the CGS position, but the casting of it wider to the impact on Sch 10 ‘clawback’ provisions where the zero rating of an original residential or charitable building is effectively nullified by a sale and leaseback, if one accepts the Court of Session’s decision in Balhousie [2019] CSIH 7.
This is a different provision to CGS. And Balhousie sold the properties outright to the lender and took back a lease, which didn’t happen in Mydibel. It also appears that the lease/leaseback transaction in Mydibel occurred before the construction costs were fully incurred, whereas in Balhousie there was (it appeared) a completed property that was then sold for a leaseback purpose. HMRC will say that all these factors (and probably others) distance Balhousie from Mydibel.
But I would not agree. The point in Mydibel – the nugget at the centre of it – is that a transaction which comprises two legs of a property grant effected solely to finance operations and where there is no real change of use, should not engage an adjustment mechanism, the sole purpose of which is to give a more accurate attribution through adjustment of the original tax treatment. In that aspect, the clawback in Sch 10 is the same as the CGS, so there is no reason to treat them differently.
If one lifts one’s eyes from the question of distinguishing facts in these cases, one sees the principle, which is that there should be no adjustment arising from lease back financing deals. For that reason, I think this strongly implies that Balhousie was wrongly decided by the Court of Session.
The wider application of Sch 10 ‘clawback’ provisions to lease back financing deals.
As you read this piece the UK may already have left the EU, though it hadn’t at the time of writing. The accepted position is that all CJEU decisions pre-dating that departure date become binding decisions at Supreme Court level. We therefore need to pay heed to the dates of decisions. The CJEU’s decision in Mydibel (Case C-201/18) makes the cut, so to speak, and would have done so by two days even had the UK left as planned on 29 March. It is therefore binding precedent.
And it has something direct to tell us about the application of the capital goods scheme (CGS) to cases where a fully taxable business creates property, and finances it through a lease and lease back scheme in which the intermediate party is a bank, and where the charges are effectively the same as would apply in a mortgage scenario. Reducing the decision to its outcome, the CJEU decided that this did not change the business’s fully taxable use of the building despite the intervening lease activities mentioned above being exempt.
Given the basis of VAT as a tax where each link in the chain of supplies is separate, as per the well-known BLP case (Case C-4/94), this could be thought surprising. It appears that the court was not happy to suspend the reality of a continuing taxable use to indulge in tax law quibbles over what was essentially a refinancing package (and no more). The key to this was that the first lease to the bank was subject inextricably to the return lease granted by the bank, such that the bank had no occupation rights whatever, and never would have. This could not be viewed as two separate supplies, but was one action (and the court even suggested it was a single supply, though of what and to whom seems a tricky point if that is to be accepted).
However, my main concern is not the impact on the CGS position, but the casting of it wider to the impact on Sch 10 ‘clawback’ provisions where the zero rating of an original residential or charitable building is effectively nullified by a sale and leaseback, if one accepts the Court of Session’s decision in Balhousie [2019] CSIH 7.
This is a different provision to CGS. And Balhousie sold the properties outright to the lender and took back a lease, which didn’t happen in Mydibel. It also appears that the lease/leaseback transaction in Mydibel occurred before the construction costs were fully incurred, whereas in Balhousie there was (it appeared) a completed property that was then sold for a leaseback purpose. HMRC will say that all these factors (and probably others) distance Balhousie from Mydibel.
But I would not agree. The point in Mydibel – the nugget at the centre of it – is that a transaction which comprises two legs of a property grant effected solely to finance operations and where there is no real change of use, should not engage an adjustment mechanism, the sole purpose of which is to give a more accurate attribution through adjustment of the original tax treatment. In that aspect, the clawback in Sch 10 is the same as the CGS, so there is no reason to treat them differently.
If one lifts one’s eyes from the question of distinguishing facts in these cases, one sees the principle, which is that there should be no adjustment arising from lease back financing deals. For that reason, I think this strongly implies that Balhousie was wrongly decided by the Court of Session.
