Ventgrove Ltd v Kuehne + Nagel Ltd
| Jurisdiction | Scotland |
| Judgment Date | 29 March 2021 |
| Court | Court of Session (Outer House) |
Court of Session (Outer House)
Lord Ericht
Barne QC; Burness Paull LLP appeared for Pursuer
Lord Keen of Elie QC; Brodies LLP appeared Defender
Value added tax – termination payment paid by tenant under break clause in lease – whether as a matter of HMRC policy VATable – at the time HMRC had not implemented ECJ decisions in Meo and Vodaphone Portugal– payment not VATable
In Ventgrove Ltd v Kuehne Nagle Ltd [2022] BVC 5 the Court of Session was required to adjudicate on whether a termination payment made by a tenant under a break clause in their lease was VATable. The Court determined that at the relevant time HMRC policy was that such payments were not VATable.
Kuehne Nagel leased a property from Ventgrove. The lease included a break clause under which, in return for a payment of £112,500 ‘together with any VAT properly due thereon’, Kuenhe Nagel could terminate the lease early. Ventgrove had opted to tax the building and all rents due under the lease were subject to VAT.
The parties were in dispute over whether or not the termination payment was subject to VAT.
HMRC policy on the VAT treatment of termination payments was revised in the light of two ECJ decisions, MEO (Case 295/17) [2019] BVC 14 and Vodafone Portugal (Case C-43/19) [2020] BVC 16. The history of its policy and the relevant dates in relation to this case are as follows:
- 2 September 2020: Revenue & Customs Brief 12(2020) published. This confirmed that although previous HMRC’s policy was that contract termination fees were not VATable, in the light of the ECJ’s decisions this policy had been revised and they were now considered to have the same VAT treatment as the underlying supply.
- 25 January 2021: Revenue & Customs Brief 12(2020) was updated and revised. In response to feedback from taxpayers, HMRC had decided that the treatment of termination payments would be changed with effect from a future date. Taxpayers could continue to apply the ‘old’ policy should they choose.
- 23 February 2021: Kuehne Nagel exercised its option to terminate the lease and made the £112,500 payment.
The Court was required to determine whether nor not, as a matter of HMRC policy, the termination payment made on 23 February 2021 was VATable.
The Court noted that HMRC’s longstanding policy was that termination payments made by a leaseholder were not VATable and that this policy has been noted by the court in Lloyds Bank plc [1996] BVC 2,875(para. 20). The Court also noted that the 25 January 2021 update to Revenue & Customs Brief 12(2020) confirmed that HMRC’s new policy would not be given effect until a later date (para. 23).
Therefore, as at 23 February 2021, HMRC policy was that the payment made by Kuehne Nagel was not VATable (para. 24).
Presumably this case is one part of a wider dispute between the parties. At the time the payment was made, HMRC’s most recent announcement on the VAT liability of termination fees had given taxpayers the option of either applying the old VAT treatment (as Kuehne Nagel wanted) or adopting the new policy of treating them as VATable (as Ventgrove wanted). If the only point of contention between the parties was the VAT treatment of the payment, it would surely have been quicker and cheaper to consult HMRC directly?
Comment by Sarah Kay, CTA, Senior Tax Writer at Croner-i.
[1] The pursuer was the landlord and the defender the tenant of commercial premises at Kirkhill Industrial Estate, Dyce. The Lease contained a break option under which the tenant was entitled to terminate the Lease on payment of £112,500 “together with any VAT properly due thereon”. The defender sought to exercise the option to terminate the Lease and made a payment of £112,500 but made no payment in respect of VAT. The issue in this case is whether the Lease was validly terminated, which turns on the question of whether any VAT was properly due on the £112,500.
[2] The Lease was constituted by an exchange of missives dated 12, 13 and 22 December 2016 and took the form of a draft lease appended to the missives (the “Lease”). The term of the Lease was ten years subject to a break option. The rent was £450,000 per annum.
[3] The break option was in the following terms:
3.1 … The Tenants shall be entitled to terminate this Lease on [ ] December 2021 [insert day prior to the 5th anniversary of the Term Commencement Date] (the “break date”)] provided that (i) the Tenants have served written notice on the Landlords to that effect and (ii) the Tenants have paid the sum of One Hundred and Twelve Thousand Five Hundred Pounds (£112,500) (together with any VAT properly due thereon) to the Landlords, in both cases (i) and (ii) no later than [ ] March 2021, time being of the essence, failing which the entitlement to terminate the Lease on the Break Date will not apply.
Although the draft lease appended to the missives had blanks it was common ground that in terms of that break option the defender was entitled to terminate the lease as at 3 January 2022, provided that the defender had fulfilled the conditions for exercising the break by 3 April 2021.
[4] Clause 4 of the draft lease provides inter alia:
The tenants HEREBY bind and oblige themselves to observe and perform throughout the Term the following conditions, obligations and others …
Without prejudice to any other right or remedy otherwise available to the Landlords, if the rents payable or any other sum due under this Lease (whether formally demanded or not) or any other sum payable by the Tenants under this Lease shall remain unpaid (for whatever reason (including where the Landlords have declined to accept rent so as not to waive any breach or alleged breach of covenant)) after the date when payment was due, to pay interest thereon at the Prescribed Rate from and including the date on which payment was due to the date of payment to the Landlords (both before and after any judgment) …
4.4.1 To pay to the Landlords on demand and to indemnify the Landlords on demand against any VAT in respect of any payments made or consideration provided by the Tenants under the provisions of this Lease or supplies made by the Landlords to the Tenants under the terms of, or in connection with, this Lease including without limitation any VAT arising as a result of the Landlords exercising an option to tax in respect of the Property pursuant to paragraph 2, Schedule 10, Value Added Tax Act 1994 and, in default of payment, the same shall be recoverable as rent in arrear.
To pay to the Landlords on demand and to indemnify the Landlords on demand against all VAT input tax incurred by the Landlords in respect of supplies made to the Landlords (including supplies which the Landlords are deemed to make to itself) the cost of which the Tenants are obliged to reimburse to the Landlords under or by virtue of the terms of this Lease save to the extent that such VAT input tax is recovered by the Landlords.
[5] By Option to Tax dated 10 July 2013, the pursuer elected to charge VAT on rental of the premises with effect from 15 July 2013 in terms of paragraph 20 of Schedule 10 to the Value Added Tax Act 1994.
[6] By notice dated 23 February 2021 the defender gave the pursuer notice that it was exercising its option under clause 3.1 to terminate the Lease, with the termination date of 3 January 2022. On or around 23 February 2021, the defender sent by Bacs transfer to the pursuer's bank account the sum of £112,500.
[7] By letter dated 4 June 2021, the pursuer's agents wrote to the defender's agents referring to the letter of 23 February 2021 and stating that the break option had...
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Ventgrove Ltd v Kuehne+Nagel Ltd
...Ltd v Kuehne Nagle Ltd [2022] BVC 10 the Inner House of the Court of Session unanimously overturned the decision of the Outer House ([2022] BVC 5) that in February 2021 HMRC policy was that, if the landlord had opted to tax the property, a termination payment made by a tenant under a break ......