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HMRC to appeal decision on virtual leases

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23rd Aug 2005
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To tax or not to tax ' that's the question for businesses using virtual assignments following a high court decision in the case of Abbey National v Customs and Excise, now HM Revenue and Customs. ([2005] EWHC 831)

A virtual assignment is defined as a situation where the interest in a property has been assigned to a third party without the landlord's consent and is then purported to be assigned back by the third part. The case in question revolved around the question of whether a virtual assignment of a property lease and the subsequent lease back is a property management service, and therefore subject to VAT; or a lease or letting of immovable property, which is exempt.

The virtual assignments occurred when Abbey decided to transfer its property portfolio to a third party, Mapeley. Where the property was freehold or subject to a long lease there was no problem, but in the case of short-term leases, the owners' permission was required. As it was felt there was insufficient time to gain these consents, Abbey transferred the economic benefits and burdens to Mapeley but remained in occupation. It paid Mapeley a principal fee, which was similar to the rent it would have paid if there had been a formal lease back.

HMRC argued that because Mapeley was not given the right to occupy the property, it cannot have made the exempt supply of letting the property back to Abbey. The VAT tribunal agreed. However, the high court judge, Mr Justice Hart, disagreed, saying that letting 'can include a situation where no right of occupation is in fact granted', for example when a third party is given the right to the rent from the original lessee.

The second strand to the case applied in the cases where Mapeley had found undertenants on behalf of Abbey. HMRC had argued that Mapeley was collecting these rents on behalf of Abbey but both the VAT tribunal and the high court disagreed, saying the agreement between Abbey and Mapeley meant the rents accrued to Mapeley. This means that a third party collecting rents from undertenants will be treated as the person who made the exempt supplies. This strand of the case will not be appealed.

HMRC has received permission to appeal the first strand of the case and it still takes the view that virtual assignments are a taxable supply. This means that it feels third party suppliers should continue to account for VAT on the taxable supply.

In its report on the ruling HMRC says: 'As HMRC is appealing against the decision of the high court, taxpayers may wish to tax the supplies pending the outcome of that appeal.

'HMRC will issue assessments to taxpayers who chose to follow the high court decision and exempt their supplies, but will not enforce these assessments unless it is ultimately successful on appeal. If this is the case, interest and penalties will be applied to the assessments.'

A third option is to submit a voluntary disclosure either on the form or with a covering letter, saying the claims are not to be repaid until the litigation has concluded. If such annotations are not made, taxpayers will be treated as having followed the decision of the high court.

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