Customs & Excise v Mirror Group and Cantor Fitzgerald Part 2

Earlier in the year we reported that Advocate General Tizzano had produced his 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 a new lease (Mirror Group case) and a payment by a tenant to an assignee of the lease as an inducement to accept an onerous lease (Cantor Fitzgerald case). The decisions of the ECJ have at last been released and, unusually, they depart from the opinion of the Advocate General.

Mirror Group case

The Advocate General had concluded that a payment made by the landlord to induce the tenant to take up the new lease was a payment for an exempt supply of "the letting or leasing of immoveable property" (within Article 13B EC Sixth Directive) made by the tenant. Neither the landlord nor the tenant had opted to tax the property and therefore it was unnecessary to consider whether under EU law it is the landlord's election or the tenant's election that would convert the exempt supply into a taxable supply.

The ECJ however held that the exemption for "the leasing or letting of immoveable property" does not extend to a person who does not already have an interest in the property. Therefore, the payment to Mirror Group could not fall within the exemption. However, the ECJ also decided that the tenant does not make a supply at all unless the tenant undertakes to do something over and above merely taking the lease. The example given by the ECJ was that of the "anchor tenant" who by agreeing to take a lease is, in effect, undertaking to attract other tenants to the building (thereby making a standard rated supply of advertising services).

Cantor Fitzgerald case

The Advocate General had concluded that the payment made by the existing tenant to induce the assignee to take an assignment of the onerous lease was a payment for an exempt supply of "the letting or leasing of immoveable property" (within Article 13B EC Sixth Directive) made by the assignee. As in the Mirror Group case, neither the existing tenant nor the assignee had opted to tax the property so that it was not necessary to consider how the VAT status of the payment would be affected if either party had opted to tax the property.

The ECJ (which was composed of the same judges as in the Mirror Group case and which heard the case on the same day as the Mirror Group case) again declined to follow the Advocate General's opinion. It decided, as in the Mirror Group case, that the exemption for "the letting or leasing of immoveable property" could not apply where the supply is made by a person that does not at the time of the supply already have an interest in the property. However, it also concluded that the assignee would always be making a supply in accepting an assignment of a lease in return for a payment and that that supply would be standard rated.

Implications

1. The decisions of the ECJ that the Article 13B exemption does not apply in these circumstances is clear and, in our view, correct and is in line with the general principle that exemptions must be construed narrowly.

2. The position on assignments of onerous leases is now clear; the payment received by the assignee is in return for a standard rated supply by the assignee to the outgoing tenant. Customs & Excise will now require assignees to account for VAT in respect of past transactions where they have not done so pending the final outcome of these cases. Where the outgoing tenant has withheld the VAT element (perhaps, under "escrow" arrangements) this will, in due course, be released in accordance with the terms of the contract or other arrangements concluded at the time.

3. The position on inducement payments made on the grant of a new lease is more uncertain. If the ECJ decision is taken at face value, this would seem to require an assessment as to whether the tenant is a particular case has provided service over and above simply taking the new lease. This may be reasonably clear in the case of the first high profile tenant signed up in a large retail development. But what of the fifth and sixth tenants? It would seem that the test is a subjective one: "why is the landlord making the payment to the tenant"? Is it only the landlord's intention that matters or do the parties need to document the purpose behind making the payment? Past transactions will need to be reviewed individually taking account of the contractual provisions agreed upon at the time. Tenants may wish to proceed on the basis that the inducement payment is standard rated unless Customs & Excise give a specific ruling to the contrary. Landlords that have not opted to tax the property (and for whom a VAT charge would constitute a cost) may wish to pursue the line that the tenant has made no supply at all. The case is a recipe for confusion.

4. Although Customs & Excise won the Mirror Group case, they will not be satisfied with the outcome. Customs are no doubt currently considering its implications and it can be expected that they will, in due course, issue a Business Brief outlining their interpretation of the case which is likely to be that the situations where no VAT is due will be rare. This may be the right approach in our view but is not necessarily consistent with the judgment in the ECJ. This is regrettably another poor decision from the ECJ which raises more questions than it answers. The VAT implications of making an inducement payment to a prospective tenant will need to be considered in the context of each particular transaction.

If you think that the above decision may be relevant to you and you would like further advice contact Richard Croker (020 7367 2149,[email protected]), Mark Nichols (020 7367 2051, [email protected]) or Mike Boutell (020 7367 2218, [email protected]).