Ashtons Legal (A Partnership)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 November 2022 |
| Neutral Citation | [2022] UKFTT 422 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 422 (TC)
Judge Anne Scott
First-Tier Tribunal (Tax Chamber)
VAT – To whom was the supply of the leases made? – Contractual leases or commercial and economic reality – Airtours considered – Aldridge considered – VATA 1994, s. 24(1)(a) – Appeal allowed.
In Ashtons Legal (A Partnership) [2022] TC 08641, the FTT concluded that a partnership could recover VAT incurred on lease payments made to a landlord in respect of office space. The lease was in the name of a nominee company. The FTT found that as a matter of commercial and economic reality the partnership received the supply.
The appellant was a partnership trading as a firm of solicitors. It traded from offices leased from a landlord. Under the Property Act 1925 a lease cannot be entered into with more than four partners. In order to accommodate this legal restriction, the lease was in the name of Ashtons Legal Ltd, a dormant company with one £1 share owned by the lead partner. The appellant provided financial guarantees for the rent, received invoices from the landlord, paid those invoices and recovered VAT charged as input tax via its VAT return.
HMRC determined that the VAT incurred on the lease was not recoverable by the appellant. A VAT registered person can only recover VAT as input tax if it was incurred on a ‘supply to’ that person (VATA 1994, s. 24(1)(a)). HMRC’s view was that the company had received the supply.
The FTT concluded that as a matter of commercial and economic reality, the appellant received the supply and allowed the appeal.
In reaching this decision the FTT considered the following:
- In Airtours v R & C Commrs[2016] BVC 17 the court said ‘ Economic reality being what it is, commercial businesses do not usually pay suppliers unless they themselves are the recipient of the supply for which they are paying.’ (as quoted at para. 38 of this decision).
- In Lester Aldridge (a firm) [2005] BVC 2231 the VAT Tribunal had considered a similar scenario in which, to accommodate the Property Act 1925 a firm of solicitors had used a nominee company to sign the lease for its offices. The Tribunal had concluded that the firm received the supply and this decision was approved by the FTT in NT Advisors Partnership[2017] TC 06061 (para. 39).
HMRC’s argument was, in essence, that Ashtons Legal Ltd should have registered for VAT, opted to tax and granted a sublease to the appellant. The FTT agreed with the decision in Lester Aldridge where, at para. [43], the Tribunal commented that ‘this not an argument which relieves the Commissioners, or ourselves, from looking carefully at the true nature, for VAT purposes, of the transaction which the Appellant for good commercial reasons did in fact enter into.
The FTT noted that the Property Act 1925 restrictions on the number of partners who could sign a lease applied to the company just as they applied to the landlord. It also determined that ‘[Ashton Legal Ltd] was a mere cipher and inserted into the leases in these particular circumstances to deal with the [Property Act 1925]. The reality is that, as I have said at paragraph 41 above the [appellant] was at the centre of these leases as the [financial guarantees provided and other clauses within the leases themselves] make explicit’ (para. [52]).
It is surprising that HMRC decided to take this case given the similarity in fact pattern to Lester Aldridge (a firm), a case which it also lost. When determining who the recipient of a supply is, the terms of any written contract between the parties are the first matter to check, but if the written contract does not reflect the economic and commercial reality (as was the case here) other factors must be considered.
Comment by Sarah Kay, Lead VAT Writer, Croner-i Ltd.
Zizhen Yang, of Counsel, instructed by Ensors Accountants LLP appeared for the appellant
Fatouma Yusuf, litigator of HM Revenue and Customs' Solicitor's Office appeared for the respondents
[1] This is an appeal against HMRC's decision dated 20 March 2020 upheld on review on 28 August 2020 that input tax incurred in respect of two lease agreements entered into by an associated company was not recoverable.
[2] With the consent of the parties, the hearing was conducted by video link using the Tribunal's video hearing system. A face-to-face hearing was not held because of the difficulty of ensuring the safety of all participants. The documents to which I was referred comprised a hearing Bundle consisting of 295 pages and an authorities Bundle extending to 247 pages. I had Skeleton Arguments for both parties. The witness statement from Edward O'Rourke was unchallenged. In the course of Submissions, in addition, Ms Yusuf referenced HMRC's guidance VTAXPER75000 which was not in the Bundle.
[3] Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.
[4] There is no real dispute about the facts.
[5] The appellant is a firm of solicitors and is a trading partnership (the “Firm”). It has been registered for VAT since 1 October 2011. Historically, as the result of a merger, the Firm had three offices. For a number of years the Firm had been looking for alternative premises in order to consolidate their operations.
[6] Eventually in 2017, Mr O'Rourke, the Chief Executive Officer (“CEO”) of the Firm reported that suitable premises had been identified.
[7] The minutes of the Management Board of the Firm dated 13 September 2017 record that the Firm had signed Heads of Terms for new premises although that was conditional on planning permission.
[8] All negotiations in relation to the new leases were conducted by, and for, the Firm. The Firm's Management Board closely monitored the negotiations and regularly ratified their CEO's recommendations.
[9] The CEO's report of December 2017 talked of “our” lease and it is beyond doubt that that meant the Firm.
[10] The commercial relationship between the, putative and eventual, landlord (“the Landlord”) and the Firm never involved Ashtons Legal Limited (“the Company”). The Company was introduced only latterly, as I explain below.
[11] The Company was incorporated in March 2015 to protect the “Ashtons Legal” name. It has one director, Mr O'Rourke, as CEO of the Firm, and he holds the single £1 share on trust for the benefit of the Firm.
[12] It is a dormant company, has never traded, held assets or held or operated a bank account. It has never had any employees. It is not disputed that it was, and is, a shell company acting as the Firm's nominee. In the relevant period its accounts make it explicit that it is a dormant company and that there are no transactions. There is no reference to the leases.
[13] In early 2018 because, under the Law of Property Act 1925 (“the 1925 Act”), a partnership can enter into a lease in the name of no more than four partners, it was decided by the Firm that the leases should be in the name of the Company.
[14] The Landlord had made it explicit, in an email dated 14 January 2018, that if they were to contract with a shell company with no assets then they would require a guarantee from the Firm.
[15] It is clear from that email that the Landlord understood that the Firm would be in sole occupation of the premises and would meet all obligations of the Company in terms of the leases. Specifically the Firm would pay the rent.
[16] On 1 and 16 May 2019, the Company entered into two leases of business premises. Four of the partners of the Firm were parties to the leases as the “Guarantors”.
[17] Clause 24.5 of the leases reads:–
The liability of each of the persons making up the Guarantor is joint and several. If any of the persons making up the Guarantor ceased to be a partner in Ashtons Legal (a Partnership) the Landlord shall release that person from his obligations under this deed provided that a replacement partner in Ashtons Legal (a Partnership) covenants with the landlord to observe and perform those obligations in place of the outgoing partner.
[18] The Firm has at all times occupied both premises solely for the purpose of its business. The rental invoices raised by the Landlord were addressed to the Company but sent to the Firm marked for the attention of an employee of the Firm. The Firm processed and paid those invoices and reclaimed the VAT incurred through their VAT returns. The rent is shown in the Firm's accounts as a disbursement in every year.
[19] There is no sublease in place between the Company and the Firm.
[20] The Land Registry records that the Company holds the interest in the leased premises. Of course, however, the Registry does not record beneficial interests.
[21] On 29 January 2020, the Firm's accountants (“Ensors”) wrote to HMRC seeking a Non-Statutory Clearance in relation to the treatment of VAT incurred on the two leases. In summary, they argued that the supply of the lease was to the Firm and the Firm was entitled to reclaim VAT on the rental invoices. They relied on Lester Aldridge (a firm)[2005] BVC 2231 (“Aldridge”).
[22] Ensors pointed out that consideration had been given to whether the Company could have registered for VAT, opted to tax and entered into a sublease with the Firm but that would have given rise to exactly the same technical problem under the 1925 Act.
[23] On 20 March 2020, HMRC responded stating that, on the information provided, there was a supply being made by the Landlord to the Company for the consideration payable under the leases and there was a further second supply made by the Company to the Firm for the same value. HMRC's view of the matter was that the supply to the appellant would be an exempt supply for VAT purposes as the Company had not opted to tax its...
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