VAT tribunal decision shows care needed with property leases

The First-tier Tribunal had to follow a substance-over-form approach to conclude that an office was let to a law firm, rather than the nominee tenant company, and so allow the firm to recover VAT on the rent charged. While a taxpayer win, it shows the VAT issues that can arise where the property occupier cannot enter into a contract.

The issue

It is not uncommon for the legal owner of a property interest to be different from the beneficial owner. Reasons include the beneficiaries lacking the legal capacity to enter into contracts; there being many beneficiaries who change frequently; and public figures wishing to maintain some privacy. VAT law recognises this, and treats goods and services as supplied to/by the beneficial owner.

In Ashtons Legal, an unincorporated law firm wishing to enter in a new office lease faced the issue that it had more than four partners. Under the Law of Property Act 1925, a lease cannot be entered into in the name of more than four partners. The firm set-up a dormant company which entered into the lease with the landlord. Partners in the firm guaranteed the lease payments and it was entirely clear to the landlord that its real tenant was the firm. Although rental invoices were addressed to the company, they were sent to the firm, which paid them and recovered the VAT thereon.

HMRC argued that the landlord’s lease was with the company, i.e. it was the legal and beneficial owner, and that the law firm had no right to reclaim the VAT on a service provided to the company.

Why does this matter?

In this case, the tribunal accepted the commercial reality of the situation over the legal form and allowed the firm’s appeal. However, this will have been a challenging argument to make, as the courts will start with the legal documents, and it needs to be shown that these do not represent economic reality in order to set these aside. The judge notes that she had received over 500 pages of documents; no doubt making this an involved and likely costly matter to resolve.

The case demonstrates again the complexities that can arise in property transactions. It also shows that these issues can affect not only clients, but professional firms themselves. As with most tax matters, upfront planning and timely advice can help to avoid the potential for unexpected tax costs.

Further information

For further information or to discuss how we can help you, please contact Adam Cutler or your usual Crowe contact.