Flashback on ECJ cases C-63/92 (Lubbock Fine) – Scope of VAT Exemption for Letting of Immovable Property

On December 15, 1993, the ECJ issued its decision in the case C-63/92 (Lubbock Fine).

Context: Tax provisions ° Harmonization of laws ° Turnover taxes ° Common system of value added tax ° Exemptions provided for under the Sixth Directive ° Exemption for the letting of immovable property ° Definition ° Consideration paid for the surrender of a lease ° Included ° Tax demanded under the Member States’ power to limit the scope of the exemption ° Not permissible

Article in the EU VAT Directive

Articles 13B(b), 13B(g) of the Sixth VAT Directive (Articles 135(1)(l), 135(2) and 135(1)(j) of the EU VAT Directive 2006

Article 135

1. Member States shall exempt the following transactions:

(j) the supply of a building or parts thereof, and of the land on which it stands, other than the supply referred to in point (a) of Article 12(1);
(l) the leasing or letting of immovable property.

Facts

By orders of 30 July 1991 and 26 February 1992, received at the Court on 3 March 1992, the Value Added Tax Tribunal, London Tribunal Centre, referred to the Court for a preliminary ruling under Article 177 of the EEC Treaty three questions on the interpretation of Article 13B(b) and (g) of the Sixth Council Directive of 17 May 1977 (77/388/EEC) on the harmonization of the laws of the Member States relating to turnover taxes ° Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter “the Sixth Directive”).
Those questions were raised in connection with an appeal by a firm of chartered accountants, Lubbock Fine & Co (hereinafter “Lubbock Fine”) against an assessment to value added tax (VAT) made by the Commissioners of Customs and Excise (hereinafter “Customs and Excise”) in respect of the consideration received by Lubbock Fine for the surrender of a lease. In 1971 Lubbock Fine took a lease of premises belonging to Esso Pension Trust Ltd for 25 years and one quarter. The premises were subsequently sold to Guildhall Properties Ltd. In 1990 Guildhall Properties Ltd and Lubbock Fine entered into an agreement under which Lubbock Fine surrendered the residue of the lease and returned the premises to Guildhall Properties Ltd with effect from 1 June 1990. The latter paid Lubbock Fine 850 000 by way of consideration for the surrender.
Customs and Excise took the view that under the relevant United Kingdom legislation, the Value Added Tax Act 1983 as amended by the Finance Act 1989, VAT was chargeable on the consideration and accordingly made an assessment upon Lubbock Fine in the sum of 110 869.56. Item 1 of Group 1 of Schedule 6 to the Value Added Tax Act 1983, as amended, exempts from VAT “the grant of any interest in or right over land or of any licence to occupy land …”. It follows from that provision, read in conjunction with an explanatory note, that in the United Kingdom the letting or sub-letting of immovable property and the assignment of a lease of immovable property are, in principle, exempt transactions. However, the surrender of a lease to the tenant’ s immediate landlord is excluded from exemption.
In support of its appeal to the Value Added Tax Tribunal Lubbock Fine contended that the provision excluding surrenders from the scope of the exemption was contrary to Article 13B of the Sixth Directive.

Questions

1. Whether the surrender of a lease of immovable property for consideration paid by the landlord to the tenant is a supply within the words ‘the leasing or letting of immovable property’ contained in Article 13B(b) of the Sixth Directive;
2. If the answer to Question 1 is in the affirmative: whether a Member State is entitled to exclude such a surrender from exemption, and thus tax it, by virtue of the final words of Article 13B(b) of the Sixth Directive, namely ‘Member States may apply further exclusions to the scope of this exemption’ ;
3. If the answer to Question 1 is in the negative: whether the surrender of a lease of buildings, or parts thereof, for consideration paid by the landlord to the tenant is a supply within the words ‘the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(b)’ contained in Article 13B(g) of the Sixth Directive.

AG Opinion

The surrender of a lease in return for compensation paid to the tenant falls within the term ‘letting of immovable property’ in Article 13B(b) of the Sixth Directive.

The last subparagraph of that provision does not confer on Member States the right to exclude such a transaction from the exemption provided for by the first subparagraph of that provision, subject however to the right of option provided for by Article 13C(a) of the directive.

Decision

1. The term “letting of immovable property” used in Article 13B(b) of the Sixth Council Directive of 17 May 1977 (Directive 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes ° Common system of value added tax: uniform basis of assessment) to define an exempt transaction covers the case where a tenant surrenders his lease and returns the immovable property to his immediate landlord.

2. Article 13B(b) of Directive 77/388, which allows Member States to apply further exclusions to the scope of the exemption for the letting of immovable property, does not authorize them to tax the consideration paid by one party to the other in connection with the surrender of the lease when the rent paid under the lease was exempt from VAT.

Summary

The term “letting of immovable property” used in Article 13B(b) of the Sixth Directive (77/388) on the harmonization of the laws of the Member States relating to turnover taxes to define a transaction which is compulsorily exempt from VAT covers the case where a tenant, for consideration, surrenders his lease and returns the immovable property to his immediate landlord.

The same provision, which allows Member States to apply, in addition to the specified exceptions, further exclusions to the scope of the exemption for the letting of immovable property, does not authorize them to tax such consideration when the rent paid under the lease was exempt under the said rule. The relations created by a lease cannot be broken up.

Source