Customs & Excise v Mirror Group : Customs & Excise v Cantor Fitzgerald

Advocate General Tizzano has produced his long awaited opinion in these joined cases which deal with the VAT status of a payment made by a landlord to an incoming tenant as an inducement to accept the new lease and a payment by a tenant to an assignee of an onerous lease as an inducement to accept the assigned lease.

In each case, Customs argued that the supply made by the taxpayer was standard rated and not exempt. However, the Advocate General has concluded that both the tenant and the assignee made exempt supplies within Article 13B of the Sixth Directive (which exempts "the leasing and letting of immoveable property") and that accordingly VAT was not chargeable. Whilst it is possible that the European Court could reach a different conclusion it seems likely that the Court will follow the Advocate General's opinion. However, it may be some months before the Court hands down its decision.

In the meantime, if you have been a party to a transaction where an inducement payment has been made you should consider your position. The contractual documentation may have dealt with the position specifically pending the outcome of these cases. If not, and VAT was paid, then there will be different considerations for payers and payees.

Where a payer was exempt or partially exempt so that full recovery of the VAT paid as input tax was not possible, demand should be made from the payee subject to consideration of the precise terms of the contract. A payee will wish to stall pending the handing down of the Court's final decision.

A payee will need to consider his position carefully. If a claim to Customs for the repayment of the VAT is to be made it must be made within three years of the original supply having been made. If a payee has not already made a protective claim (and is still within the three year time limit) he should consider making a protective claim to preserve his rights. Assuming that the European Court follows the Advocate General's opinion, Customs will only make repayments of VAT in respect of claims submitted to them provided that the claimant would not be "unjustly enriched" if the repayment is made. In this respect, Customs will only make the repayment if the VAT is passed on to the payer. Whether the payer is entitled to be repaid the VAT will depend upon the terms of the original contract although it is likely that most contracts will give that right to the payer.

One feature of these cases is that none of the relevant parties had opted to tax the property. Under UK law, the exempt supply can only be converted into a standard rated supply if the option to tax is made by the person making the supply. Therefore, unless the tenant accepting the inducement payment or the assignee accepting the onerous lease has opted to tax in relation to the property, these supplies would be exempt. It is a moot point whether under European law the supplies could be regarded as standard rated if there was an option to tax that had been exercised in relation to the property by another person ie the landlord. It is not thought that it would be open to Customs to argue this point in another case where the option to tax had been exercised by a landlord (or assignor) since Customs cannot rely on European law where UK law is clear (although the taxpayer can). Accordingly, we take the view that it is open to the payee to make a repayment claim (subject to unjust enrichment as above) provided he has not exercised an election.

If you think that the above decision may be relevant to you and you would like further advice on how or whether to make a claim please contact Mark Nichols (+44 (0) 20 7367 2051, [email protected]), Richard Croker (+44 (0) 20 7367 2149, [email protected]) or Mike Boutell (+44 (0) 20 7367 2218, [email protected]).