Under s34 of the Law of Property Act 1925, the maximum number of people who can jointly hold legal title to land in England and Wales is four. This presents a difficulty when a partnership of more than four people wishes to take a lease.
One solution is for the lease to be taken in the name of only four of the partners. That has some commercial disadvantages, not the least of which is that the partners concerned remain personally liable for the rent and other obligations under the lease for its entire duration (even after they have retired from the partnership). The second potential solution is for the lease to be taken in the name of a dormant company, acting as nominee for the partnership, with the partnership guaranteeing the company’s obligations to the landlord.
The latter is commonly encountered. But does it cause a problem with recovery of any VAT charged by the landlord on rent payable under the lease?
As long ago as 2004, arrangements of this kind came before the VAT Tribunal in the case of Lester Aldridge. HMRC took the position that the tenant under the lease was the company; the company was liable to pay the rent; the supply for VAT purposes was made to the company; so it was only the company, and not the partnership, that could recover VAT.
HMRC lost that case: the VAT Tribunal held that viewing the arrangements in their entirety, the partnership ‘can rightly be regarded as receiving for VAT purposes a taxable supply’ used for the purposes of the business it carried on.
That decision has been cited with approval in the 2017 First-tier Tribunal (‘FTT’) case of NT Advisors. All the more odd, then, that when in 2020 Ashtons Legal, a partnership of solicitors, asked HMRC to confirm that they were entitled to recover VAT in respect of arrangements entered into in 2019 which were substantially identical to those of Lester Aldridge, HMRC refused to do so; and upheld the refusal on review. This, despite Ashtons Legal having expressly drawn the Lester Aldridge case to HMRC’s attention.
Thus, Ashtons Legal found themselves having to argue the case before the FTT in [2022] UKFTT 422 (TC).
The FTT seems to have been unimpressed with HMRC’s approach, especially with what it described as HMRC’s ‘bland and unsupported assertion’ including reliance on one case that ‘has no application to the facts of this case’. Rather, looking at the ‘economic and commercial reality’ the FTT had ‘no hesitation in finding that [Ashtons Legal] used, enjoyed and benefitted from the rental of the premises and had a vested interest in the supply of those premises for which it was paying’.
As if to drive the point home, the FTT’s decision was expressed using almost exactly the same words as the VAT Tribunal used nearly 20 years ago:
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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