Virtual VAT

HMRC, in its Business Brief 16/2005 has provided guidance on how it intends to treat supplies of virtually assigned property and the use of VATA 1994, Sch 10 para 8, following the High Court's decision in Abbey National plc v CCE (CH/2004/APP/0496). (See Taxation, 19 May 2005, p179.)
The High Court overruled the tribunal and allowed Abbey National's appeal. It agreed that Abbey's right of occupation under a virtual assignment (where Abbey had not legally transferred its interest to the third party) could still be viewed as a genuine right of occupation granted to it by the third party and thus a genuine right of occupation had been granted by the third party to Abbey even though the third party did not have a right of occupation itself to pass on. The virtual assignment of the relevant properties back to Abbey by a third party was thus a supply equivalent to 'a leasing and letting of immoveable property'.
The Court of Appeal has given HMRC leave to appeal against this decision of the High Court.
HMRC has not appealed against the High Court's agreement with the tribunal that leases that Abbey had virtually assigned to the third party and where the property was occupied by Abbey's sub-tenants were a deemed supply by virtue of VATA 1994, Sch 10 para 8 by the third party to Abbey's sub-tenants. This was because the agreement between Abbey and the third party incorporated a clear and unambiguous declaration of trust, whereby the rents paid by the sub-tenants accrued in full for the benefit of the third party. This followed the decision in the case of Nell Gwynn House Maintenance Fund Trustees [1999] STC 79.
HMRC hold to the view that a virtual assignment agreement as in the first scenario above (i.e. the lease back to the original leaseholder, here Abbey) is not an exempt supply of an interest in land, but is a taxable supply of management and agency services. HMRC consider that the third party provider should continue to account for VAT on the taxable supply. Assessments will be issued on taxpayers who follow the High Court decision and exempt their supplies, but these will not be enforced pending the outcome of the appeal. If HMRC are successful, interest and penalties will be applied to the assessments.
Taxpayers who follow HMRC's views may submit voluntary disclosures to protect their position, but should make it clear that claims are not to be repaid pending the appeal. If a claim is repaid, HMRC will treat them as having followed the decision of the High Court.
HMRC also point out that an option to tax cannot be made retrospectively and taxpayers may wish to take that into account when considering their course of action.
The Business Brief also outlines the situation regarding the application of VATA 1994, Sch 10 para 8 where a legal transfer of an interest in a property is contemplated and the benefit of all of the consideration received from sub-leases accrues to a third party.

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