Reverse premiums on lease assignments are exempt from VAT 1

Mike Boutell reports that reverse premiums on lease assignments are exempt from VAT

The VAT Tribunal has recently held that payment of a reverse premium by the assignor to the assignee in return for the assignee taking an assignment of an onerous lease was an exempt supply by the assignee (Cantor Fitzgerald International v HM Customs & Excise). The tribunal held that the payment of a reverse premium in these circumstances falls within the exemption for leasing or letting of immovable property in Article 13B EC Sixth Directive. The tribunal applied the European Court of Justice decision in Lubbock Fine v. CCE (which held that payment by a landlord to a tenant in return for the tenant surrendering his lease is exempt unless the option to tax has been exercised). The Lubbock Fine principle could be extended to other payments made in connection with leases. Exemption was available not only to payments made to the landlord on variation or surrender but also in relation to any subsequent transactions (including payment to a third party on assignment) which are based on the lease.

The case overturns the policy of H M Customs and Excise that such premiums are fully vatable supplies.

Customs are appealing against the decision and it is conceivable that the case might ultimately go to the European Court. This is a complex area of law and a further pronouncement by the European Court in this area would provide welcome clarification. The taxpayer's success in Cantor Fitzgerald opens up the question as to whether further supplies made in connection with a lease could be regarded as exempt. For example, inducements paid by landlords to tenants on the grant of a lease are currently treated as standard rated irrespective of whether landlord or tenant has opted to tax. If the exemption contained in the Sixth Directive is to be interpreted very widely these payments might be properly exempt from VAT.

Implications for assignees

In the meantime assignees may be able to claim VAT back. They should identify any previous transactions that may be affected by Cantor Fitzgerald so that an early decision can be made as to whether a claim to Customs for the refund of VAT might be made. This needs to be done immediately since Customs will refuse claims relating to supplies made over 3 years ago. Customs will also refuse claims where the repayment would "unjustly enrich" the claimant. In most cases this means that Customs will refuse repayment unless the VAT is passed on to the recipient of the supply (the assignor). Assignees may well receive requests from assignors for the refund of VAT previously charged to them on an assignment.

Implications for assignors

Assignors that are exempt or partially exempt for VAT purposes should identify any reverse premiums that they may have paid in the last few years with a view to obtaining a repayment from the assignee. Bearing in mind the 3 year time limit, this needs to be done quickly.

So far as future transactions are concerned, taxpayers are entitled to rely on the Cantor Fitzgerald decision. However, matters are not quite that simple. If taxpayers rely on this decision but Customs are successful in their appeal, Customs will require an assignee to account for the VAT that should have been collected together with interest. As such it is unlikely that assignees will agree not to charge VAT without an appropriate mechanism for ensuring that the assignee can be fully recompensed if Customs are ultimately successful. In appropriate cases the VAT should be put on deposit.