In a resounding judgment handed down on Friday 6 May, Mr Justice Hart ruled that a "synthetic" assignment and lease back should be treated in exactly the same way as a legal assignment and lease back.
Abbey wanted to release capital and not take on long-term property market risk as regards its large estate, so in 2000 it sold most of its properties to Mapeley, a property investor. As part of the arrangement, where landlords consent to the assignment of Abbey’s leases to Mapeley was not available, a set of virtual or "synthetic" assignments and leasebacks were entered into. These had the economic effect of putting Mapeley in occupation of the properties – but what was the effect for VAT purposes?
Customs argued that the virtual arrangements amounted to a property management agreement so that Mapeley should charge VAT to Abbey. They also argued that rents from undertenants now in the hands of Mapeley were further consideration for the taxable management service provided to Abbey.
Abbey lost on the first point at Tribunal and won on the second. Abbey appealed to the High Court and Mapeley cross-appealed. The High Court has found for Abbey on both counts.
Implications
The judgment has some importance for the property industry. Where a "synthetic" assignment or lease can be written, which in functional and economic terms is equivalent to a full legal and beneficial assignment or lease, the VAT liability should be the same i.e. exemption unless it has been waived.
The Abbey arrangement involved virtual assignments and leasebacks under the general provisions of a master agreement whereby subject to the consent of the landlord, Abbey was committed to sell the lease and Mapeley to buy it. If the Abbey judgment is upheld, it will mean such virtual interests can be treated as full interests in land for VAT purposes.
It remains to be seen however, whether pure "synthetic" lease arrangements or other derivative arrangements can be made to work in this way without an overriding agreement to sell or lease the underlying asset. If so, there is potential for significant savings in transaction costs and SDLT.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 11/05/2005.
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