VAT implications of the retention of rights on the grant of a lease
17 December 2008
The VAT Tribunal has recently dealt with a number of questions in connection with the VAT implications of the retention of various rights on the grant of a lease. In particular the question on whether such arrangements can be considered barter transactions on which VAT is chargeable has been considered.
King's School Gloucester ("KSG") granted a lease to a partnership over some sports fields on which the partnership operated a commercially run sports centre. In return for the grant of this lease, KSG received a peppercorn rent and was allowed to use the facilities at the sports centre at certain defined times. The partnership subsequently transferred its business to a company, Riverside Sports & Leisure Limited ("Riverside") and also assigned to Riverside the benefit of the lease.
HMRC claimed that in allowing KSG to use the facilities at the sports centre, Riverside was making a supply of services to KSG and that the grant of the lease in return for the provision of these services was a barter transaction on which VAT was chargeable.
Riverside appealed the assessment arguing that the rights of KSG to use the facilities at the sports centre had been carved out of the property originally demised under the lease and that as such, there was no supply of services made.
- The VAT Tribunal was asked to consider the following questions:
Was there a barter transaction or were KSG's user rights simply something retained by KSG when the lease was originally granted?
- If there was a barter transaction, how should the consideration 'received' by Riverside in return for the supply of services be quantified?
The Tribunal held that in allowing KSG to use the facilities at the sports centre, Riverside was making a supply of services and that these services were being supplied in consideration for the grant of the lease. The Tribunal rejected the argument that KSG's rights to use the facilities at the sports centre were a reservation of rights, carved out of the property originally granted under the lease.
In support of this conclusion the Tribunal noted that the services supplied did not include services that could practically be retained from the grant of the lease – for example the provision of a heated and chlorinated swimming pool which was also available to the public.
In order to value the services provided such that an appropriate VAT liability could be calculated, the Tribunal held that the price at which the same services were supplied to third party purchasers should be looked at, but that adjustments should be made to account for group discounts and to account for the fact that KSG used the facilities at off peak times.