Partnership recovers VAT on associated company’s lease

In Ashtons Legal v HMRC [2022] TC08641, the First Tier Tribunal (FTT) found that a partnership was able to recover input VAT on property leases entered into by an associated company. The economic and commercial reality was that the partnership was the recipient of the supply.

• Ashtons Legal, a firm of solicitors trading as a partnership, located alternative premises from which to carry out its operations.
• Negotiations in respect of the leases for the premises were carried out by, and on behalf of, the partnership, which also signed the heads of terms.
• In 2018, it was decided that the leases should be in the name of a company, Ashtons Legal Limited (the company).
  • This decision was made as under the Law of Property Act 1925, a partnership can enter into a lease in the name of no more than four partners.
  • Ashtons Legal Limited had been incorporated in March 2015 to protect the Ashtons Legal name. The company had one director who was the partnership’s CEO. He held the single £1 share on trust for the partnership.
  • It was accepted that the company was a dormant shell company, acting as the partnership’s nominee.
• The landlord was clear that as Ashtons Legal Limited had no assets, a guarantee from the partnership would be needed in respect of the lease rents.
  • It was evident that the landlord understood that the partnership would be in sole occupation of the premises and would pay the rent.
• The leases were executed in May 2019, with the partnership taking occupation of the premises for its business.
• Rental Invoices were addressed to the company, but sent to the partnership, and marked for the attention of one of its employees.
  • These were processed, paid and the VAT was recovered on the partnership’s VAT return.
• In January 2020, the partnership sought a non-statutory clearance from HMRC in respect of recovering VAT on the leases, on the basis that it was the recipient of the supply of the lease.
• HMRC denied input VAT recovery, taking the view that the supply by the landlord was made to the company, with a second supply of equal value made by the company to the partnership.
  • This second supply was Exempt from VAT, as the company had not exercised an Option to tax.
• The partnership Appealed to the First Tier Tribunal (FTT).

The FTT found that:

• It was necessary to look objectively at the economic and commercial reality.
  • The partnership had a liability to make the rental payments if the company did not.
  • All parties knew that the company was dormant, had no assets or trade and was in no position to pay the rent. If the partnership wished the leases to continue, it had to pay the rent itself.
  • The company was a mere cypher. It was inserted into the leases to deal with land law. The reality, as made clear by the leases themselves, was that the partnership was at the centre of the leases.
• The partnership 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.
• Looking at the arrangements in their entirety:
  • The partnership was receiving a taxable Supply of goods by virtue of the leases for which it made payment.
  • The goods were used for the purposes of the business carried on by the partnership.
• The VAT charged on the rent was therefore recoverable as input tax of the partnership.

The appeal was allowed.

Comment

HMRC had argued that the company could, and should, have Registered for VAT, opted to tax and then supplied the leases to the partnership.

Such an arrangement was explicitly prohibited by the terms of the leases, and, as the tribunal judge noted, this approach ignored “The whole reason that the leases were constructed as they were ... and... would give rise to exactly the same problems with the 1925 Law of Property Act that the parties were seeking to avoid in the first instance”.   

Useful guides on this topic

Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one? 

Land & Property VAT (Subscriber guide)
An outline of the VAT treatment of some of the more common supplies of land and property.

Opting to tax land and property
What is an option to tax? What do I need to do to opt to tax? What happens if I buy an opted property?

Partnerships & VAT
Like any other business, partnerships are required to register for VAT once their taxable turnover passes the applicable threshold. However, there are some complications specific to partnerships.

External link

Ashtons Legal v HMRC [2022] TC08641