What is this decision about?
In University of Huddersfield Higher Education Corporation v HMRC [2013] UKFTT 429 (TC), the First-tier Tribunal allowed the taxpayer university’s appeal against the refusal of HMRC to grant the taxpayer relief from input tax on the basis, amongst other things, that the lease and leaseback arrangements entered into by the taxpayer in relation to a redevelopment site had constituted a breach of the European Union principle of abuse of rights. The tribunal decided that although the transactions in question had been entered into solely for the purpose of obtaining a tax advantage, it had been a tax advantage entirely consistent with the domestic legislation in point.
What is the background to this decision?
The University of Huddersfield case is one of the original three cases in which a reference was made to the CJEU on the application of the abuse of rights principle to VAT planning arrangements. In this case, the university undertook VAT deferral arrangements in relation to the redevelopment of one of its properties for use in its educational activities.
In order to prevent irrecoverable VAT arising on the services which the partially-exempt university received for the redevelopment, it granted a lease over the property to a trust whilst taking a leaseback. Both the university and the trust opted to tax the property and so charged output VAT on the rents under those leases. This also meant that the university, in its capacity as landlord of the headlease, could recover the input VAT on the building costs. It would, however, suffer irrecoverable input VAT on the rents under the leaseback. In this way, the amount of irrecoverable input VAT would be spread over a number of years.
However, it was the intention of the university that the lease and leaseback structure should in due course be collapsed, removing the ongoing irrecoverable input VAT for the university and resulting in an absolute VAT saving. The leasing structure was indeed later collapsed, though not until 2004 and after the original reference to the CJEU.
What did the tribunal decide?
The tribunal decided that the VAT planning in this case should be regarded as essentially a VAT deferral scheme only. Simple VAT deferral, as opposed to an absolute VAT saving, is not contrary to the regime of the VAT directives. As such, the scheme as originally put in place could not be attacked by HMRC. The fact that the leaseback structure inherently had the capacity for being collapsed, which would result in an absolute VAT saving, did not change this analysis and nor did the fact that the university always intended to collapse the arrangements at some point in the future.
Interestingly, the tribunal indicated that HMRC should have attacked the actual collapse of the leasing structure by issuing a VAT assessment in 2004, rather than attacking the original planning arrangements.
Does this case add to or clarify the application of the principle in Halifax plc v Customs and Excise Comrs: C-255/02 [2006] ECR I-1609?
In Halifax, the CJEU held that the principle of abuse of rights can apply in the context of VAT where transactions result in the accrual of a VAT advantage, the grant of which would be contrary to the purpose of the provisions of the VAT directives and it is apparent from a number of objective factors that the essential aim of those transactions is to obtain a VAT advantage.
The Halifax case involved transactions resulting in an absolute VAT saving by the taxpayer, but in HMRC v Weald Leasing Ltd: C-103/09 [2011] STC 596 the CJEU considered the question whether VAT deferral arrangements by an exempt trader were contrary to the VAT regime. In that case, which involved an exempt insurer acquiring assets and then entering into a lease and leaseback structure over them, the CJEU suggested that a ‘simple’ VAT deferral scheme without additional elements is not contrary to the VAT regime. Only if the deferral scheme is combined with other features, such as uncommercial rents or artificial arrangements designed to gain a tax advantage by preventing the application of domestic anti-avoidance measures, might the arrangements be susceptible to attack under the principle of abuse of law.
The tribunal decision in the University of Huddersfield case indicates that the principle in the Weald Leasing decision will apply to lease and leaseback arrangements, even where the asset is already owned by the taxpayer and even though the leaseback arrangements might later be collapsed to gain an absolute VAT saving.
HMRC has appealed against the decision. How much uncertainty will this cause businesses?
There remains significant uncertainty surrounding the scope of the Halifax principle. Two aspects of the case are likely to be the focus of HMRC’s appeal. First, the tribunal’s assessment of the scheme as only a VAT deferral scheme with a built-in feature that allowed an absolute VAT saving at a later date will no doubt be attacked by HMRC, given the finding of the tribunal that it accepted that ‘from the outset it was the university’s intention to make an absolute tax saving’. HMRC may well argue that this feature of the scheme should be regarded as sufficient to make it contrary to the purposes of the VAT rules from the outset.
Secondly, the tribunal rejected the argument that the university’s intentional use of an unconnected trust as lessee, rather than a subsidiary, to prevent the application of the UK’s anti-avoidance provisions which would otherwise have disapplied the option to tax, was sufficient to engage the principle of abuse of law. In Weald Leasing, the CJEU indicated that the involvement of an intermediate third party might be sufficient to engage the principle of abuse, where the involvement of the third party was to prevent the application of domestic anti-avoidance provisions which would have required VAT to be accounted for on arm’s length values. Accordingly, HMRC may well wish this issue to be reconsidered on appeal.
What are the practical implications of this case?
The decision reinforces the principle that VAT deferral planning is not per se contrary to the regime of the VAT directives. However, significant uncertainty will still remain as to what other features of VAT deferral planning might be sufficient to engage the Halifax principle. As such, there will certainly still remain risks associated with carrying out VAT deferral planning arrangements, particularly where they involve any uncommercial features.
Interviewed by Robert Matthews for LexisNexis UK Legal News Awareness Service and Lexis®PSL Tax
