VAT and supplies to nominees

The FTT has held that input VAT on rental payments under a lease formally granted to a shell company owned by a partnership was the input VAT of the partnership actually occupying and using the premises: Ashtons Legal v HMRC [2022] UKFTT 422. The FTT rejected the argument that the arrangement involved supplies to and from the shell company leading to irrecoverable input VAT.

More generally, the decision highlights some of the difficulties in applying a VAT analysis to circumstances involving a nominee or bare trust arrangement.

Background

The case concerned a lease entered into 2019 for the use of Ashtons, a firm of solicitors. Ashtons had negotiated the terms of the lease, but because the Law of Property Act 1925 requires that a lease be in the names of no more than four partners, it was decided that the lease should instead be taken out in the name of a shell company owned by the partnership. The landlord in turn required the partners of the firm to be guarantors of the rental payment and other obligation under the lease.

HMRC took the view that these arrangements meant that the lease had been formally granted to the shell company and that the VAT charged on the rental payments was input VAT of that company. The correct analysis was either than the payments actually made by the partnership to the landlord were made as guarantors under the lease or that there was a sub-lease to the partnership which (if the company had registered for VAT) would have amounted to an exempt supply as the company had not opted to tax the premises.

Decision of the FTT

The FTT has rejected HMRC’s arguments.

Whilst recognising that the mere fact that the firm paid the rentals did not mean that it received the supplies of land, the substance and reality in this case was that the premises were leased to the partnership. It was clear that the lease was negotiated with a view to the firm taking the lease and occupying the premises for the purposes of its business. The economic and commercial reality was that the company was a mere cipher and the firm was at the centre of the lease.

The FTT pointed out that the earlier tribunal in Lester Aldridge (VAT Tribunal decision 18864) had reached the same conclusion on very similar facts. That case also involved a lease granted to a nominee company on behalf of a partnership for the same legal reasons. The tribunal held that the supply of the grant of the lease was nevertheless to the partnership with an important factor being the nature of the contractual terms involving guarantees and covenants by the partnership. As in this case, it was clear that the arrangements were tripartite in nature with the partnership being central to the very existence and working of the lease. The lease was negotiated with a view to the partnership taking occupation of the premises and the company was only introduced for technical reasons.

The FTT has held that the approach taken in Lester Aldridge was equally applicable here. Realistically, only the partnership could give the covenants given under the lease and the company was only able to enter into the lease because of those covenants and guarantees due to its dormant status.

The FTT rejected HMRC’s argument that the partnership was just a guarantor of the lease payments. The terms made it clear that they were much more than that. It was clear that the firm used, enjoyed and benefitted from the rental of the premises and had a vested interest in the supply of those premises for which it was paying. Viewed in their entirety, it was correct to view the partnership as the recipient of the supplies under the lease and as such it was entitled to input VAT recovery.

Comment

It is disappointing to see HMRC returning to arguments that were rejected eighteen years ago and that have no equitable merit. HMRC attempted to apply a form over substance approach in this case which does not sit well with the accepted principle of commercial and economic reality. The FTT also criticised HMRC for suggesting that there should have been back to back leases with the company in this case to overcome the input VAT problem, pointing out that this would have simply resulted in the same Law of Property Act problem for the partnership on the sublease.

The wider question of interest is whether these cases mean that when determining who is making and receiving supplies for VAT purposes it is necessary to ignore a nominee entity. Certainly that is not HMRC’s accepted approach. Generally speaking, HMRC considers that a nominee cannot simply be ignored for VAT purposes. Therefore a supply to or by a nominee is treated as being to or by that nominee and not the beneficial owner for VAT purposes, except where legislation specifically provides otherwise (such as VATA 1994 Schedule 10 para 40 dealing with the benefit of rents etc accrues to the beneficial owner of property). And HMRC can point to some support for this approach in earlier decisions such as Walter Hall Group (VAT Tribunal decision 18007).

Certainly care is needed in such cases. Indeed, the tribunal in Lester Aldridge refused to endorse a general proposition that supplies should be treated as made or received by the beneficial owner rather than a bare trustee, commenting only that:

“It may be that in circumstances where the bare trusteeship or nomineeship is a known and integral part of other arrangements viewed as a whole then those arrangements will be capable of a similar analysis to that we have reached in the present appeal, but we do not by this decision hold as a general proposition that for VAT purposes a bare trusteeship or nomineeship should be disregarded or looked through.”