Law firm wins VAT battle with HMRC over office leases

VAT: Economic reality was that LLP, not company, was the real party

A law firm LLP that used a shell company to enter into leases for its offices has won an appeal against an HM Revenue & Customs (HMRC) decision that it could not recover the VAT incurred.

Judge Anne Scott in the First-tier Tax Tribunal said the “economic and commercial reality” was that it was Ashtons Legal LLP, rather than Ashtons Legal Ltd, that was at the centre of the arrangement.

The dispute concerned the East Anglian firm’s move to new premises in 2019, which came up against the provision of the Law of Property Act 1925 that says a partnership can enter into a lease in the name of no more than four partners.

As a result, the firm decided that the leases should be in the name of the company. A shell acting as the firm’s nominee, it was incorporated in 2015 solely to protect the ‘Ashtons Legal’ name. It had one director, the firm’s chief executive, who held the single £1 share on trust for the benefit of the firm.

The company entered into two leases of business premises, with four partners of the firm parties to them as guarantors, as the landlord had required. The landlord understood that it was the firm that would occupy the premises and pay the rent.

There was no sublease in place between the company and the firm. Invoices for the rent were addressed to the company but sent to the firm. It paid them and reclaimed the VAT incurred.

In 2020, Ashtons’ accountants asked HMRC for a non-statutory clearance for this. They said they had considered registering the company for VAT, opting to tax and entering into a sublease with the firm, but that would have given rise to exactly the same technical problem under the 1925 Act.

HMRC decided that 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.

It said the supply to the latter would be an exempt supply as the company was not VAT registered and had not opted to tax its interests in the properties.

As it was not a taxable person within the meaning of the law, there would be no VAT for the firm to recover. The decision was upheld on review.

On appeal by Ashtons Legal, the only issue for the tribunal was whether the leases were supplied to the firm, rather than the company.

HMRC said the firm had made the choice to insert the company into the leases and should have to “shoulder the inevitable consequence” of that.

Judge Scott said the case law was clear that she had to “look objectively, without regard to the purpose or results of the leases, at the economic and commercial reality”.

This was that, if the firm wished the leases to continue, it had to pay the rent. “The company was a mere cipher and inserted into the leases in these particular circumstances to deal with the 1925 Act.

“The reality is that… the firm was at the centre of these leases as the leases themselves make explicit.”

HMRC also argued that the company should have registered for VAT, opted to tax and then supplied the leases to the firm, but the judge pointed out that such an arrangement was prohibited by the leases.

Allowing the appeal, Judge Scott concluded: “Viewing the arrangements entered into by the firm in their entirety, the firm can rightly be regarded as receiving for VAT purposes a taxable supply of goods by virtue of the leases for which it made payment, and the goods so supplied were used for the purposes of the business carried on by the firm.

“The VAT charged on the rent was therefore input tax of the firm and recoverable as such.”

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