Ventgrove Ltd v Kuehne+Nagel Ltd
| Jurisdiction | Scotland |
| Judgment Date | 06 September 2022 |
| Court | Court of Session (Inner House) |
[2022] CSIH 40
Lord Woolman, Lord Pentland, Lord Tyre
Court of Session (Inner House)
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 accepted the ECJ decisions in Meo and Vodafone Portugal but had not applied them in full – Revenue & Customs Brief 12(2020) confirmed that terminations payments followed the VAT treatment of the underlying supply - payment was VATable even though Revenue & Customs Brief 12(2020) stated that HMRC would not apply the policy until a future date
In Ventgrove 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 clause in their lease was 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. On 23 February 2021 Kuehne Nagel paid £112,500 in order to terminate the lease.
The issue between the parties was whether or not the Kuehne Nagel had validly exercised the break clause. Ventgrove argued that a termination payment of £112,500 plus VAT was due. Kuehne Nagel argued that it was HMRC policy that such payments were non-VATable and therefore payment of £112,500 discharged its obligations in respect of lease termination.
As set out in the case report for this case when it was heard by the Outer House of the Court of Session ([2022] BVC 5), HMRC policy on the VAT treatment of termination payments changed as a result of two ECJ decisions, Meo (Case 295/17) [2019] BVC 14 and Vodafone Portugal(Case C-43/19) [2020] BVC 16. In summary, until these cases HMRC policy was that termination payments were outside the scope of VAT but these cases showed that this policy was incorrect. Termination payments are consideration for the underlying supply and follow the VAT liability of that underlying supply.
The history of HMRC’s policy announcements in relation to termination payments is as follows:
- September 2020: Revenue & Customs Brief 12(2020) published. This confirmed that although HMRC’s policy has previously been that contract termination fees were not VATable, in the light of the ECJ’s decisions this policy was being revised and they were now considered to have the same VAT treatment as the underlying supply.
- 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.
- 7 February 2022: Revenue & Customs Brief 2(2022) published. This announced that the new policy would be implemented from 1 April 2022, taxpayers could adopt the new policy early if they wished.
The Court reviewed the case law concerning termination payments and concluded that the termination payment was chargeable to VAT (para. [38]). It then considered whether, as Kuehne Nagl contended, Ventgrove had a legitimate expectation that the February 2021 payment was not subject to VAT, i.e. could Ventgrove “have resisted a claim by HMRC without having to contend that the claim was so unfair as to amount to an abuse of power” (para. [45]).
The Court concluded that it would not be an abuse of power for HMRC to depart from published policy “depart from it in circumstances where it was shown by binding judicial authority to have been wrong” and, in this case there was considerable case law on the VAT treatment of termination payments (para. [45]).
The Court further concluded that the issue and then revision of Brief 12(2020) did not create a legitimate expectation that the termination payment was non-VATable. The Court observed that the Brief explicitly stated that, following Meo and Vodafone, such payments were VATable; and as regards taxpayer behaviour, it gave taxpayers who had adopted the previous, incorrect, VAT treatment permission to continue to do so but the Brief did not give taxpayers who were considering new transactions permission to apply the incorrect VAT treatment (para. [47]).
On this basis the Court found in Ventgrove’s favour on this issue. The termination payment was therefore “properly due” on the termination payment.
As well as disappointing the tenant (Kuehne Nagel), the Court of Session’s ruling on the application of HMRC guidance could impact other taxpayers. The issue before the court was the meaning of Revenue & Customs Brief 12/20, as revised on 25 January 2021, which stated that “HMRC has decided to apply the updated VAT treatment set out in this brief from a future date”. Kuehne Nagel argued that this meant that the old HMRC guidance applied to the payment it made on 23 February 2021.
However, the Court found that the updated guidance applied to that payment. Read as a whole, the Brief was intended only to enable taxpayers who were already applying the old guidance to continue to do so. As the landlord (Ventgrove) did not have an existing policy the new guidance applied in its case.
Comment by Sarah Kay, Lead Technical Writer, Croner-i Ltd.
Pursuer and Reclaimer: Dean of Faculty, Bremner; Burness Paull LLP
Defender and Respondent: Lord Keen of Elie QC; Brodies LLP
Intervener (Advocate General for Scotland, representing The Commissioners for Her Majesty’s Revenue and Customs): R. Anderson; Office of the Solicitor to the Advocate General
[1] In December 2016 the reclaimer (“the landlord”) and the respondent (“the tenant”) entered into an agreement to lease premises at Kirkhill Industrial Estate, Dyce, Aberdeen. The lease was to be for a period of ten years, subject to a break option entitling the tenant to terminate the lease after five years. In order to exercise the break option, the tenant required, on or before a specified date, to give notice of termination and to pay the sum of £112,500 “together with any VAT properly due thereon” to the landlord. Time was stated to be of the essence.
[2] By notice dated 23 February 2021, the tenant exercised the break option and remitted the sum of £112,500 to the landlord. After the last date when the option could have been exercised, the landlord intimated that it refused to accept that the option had been validly exercised because the tenant had failed to pay the sum of £135,000, including VAT amounting to £22,500, said to be due on the payment of £112,500.
[3] In this commercial action, the landlord seeks declarator that the purported exercise by the tenant of the break option was of no force or effect. By interlocutor dated 22 December 2021 the commercial judge repelled the landlord's first plea-in-law and refused to grant the declarator sought. The landlord now reclaims that decision. There is a cross-appeal by the tenant concerning the proper interpretation of the terms of the lease.
[4] The principal issues for determination are whether, as a matter of law, VAT was “properly due” on the break option payment and, if so, whether the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) would have been entitled to demand it from the landlord. In these circumstances, the court invited the intervener, on behalf of HMRC, to present submissions. That invitation was accepted and we are grateful to HMRC and to counsel for their assistance.
[5] The lease was never executed. The parties agreed, however, that they were bound by the terms of a draft lease appended to the missives exchanged between them, and they have conducted their affairs on that basis. The break option, in Clause 3.1 of the draft lease, was as follows:
… 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.
It is common ground that the clause should be interpreted as entitling the tenant to terminate the lease as at 3 January 2022, provided that it had fulfilled the conditions for exercising the option by 3 April 2021.
[6] Clause 4 of the lease, entitled “Tenant's Obligations”, stated inter alia as follows:
Clause 4 of the lease, entitled “Tenant's Obligations”, stated inter alia as follows:
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...
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