In this article Michael McNeill considers the decision of the First Tier Tribunal in Harley Scott Commercial Ltd, where long leases of self-storage units were held to be VAT exempt.

Case of Harley Scott Commercial Ltd [2021] UKFTT 368 (TC)

The Appellant supplies long leases of self storage “Store Pods” to investors who intended to obtain income from them when they are let to third parties who store their property in them. The tax authority, HMRC, sought to argue that the Appellant’s supplies to the investors were taxable and assessed for output VAT. However, the First Tier Tribunal (FTT) held that the long leases are not supplies of taxable self-storage, nor are they leases of immovable property. In fact, the FTT considered them to be parts of a building, registered at the Land Registry and similar to flats in a block. The long leases were therefore VAT exempt.

Background

In December 2014, the Appellant purchased the freehold of a building which it did not opt to tax. The Appellant engaged third party contractors to fit out the building as a self-storage facility.

The Appellant marketed and sold leases in the Store Pods. The purchasers were pension funds, Self Invested Personal Pensions and individuals (‘the Investors’). The Investors paid a lump sum premium calculated at £150 per square foot, an annual ground rent of 50p per square foot, an insurance rent and, while the Store Pod was occupied, a service charge, initially £1.95 per square foot per annum, to cover maintenance expenses, electricity and insurance. Any failure to pay any of these charges would lead to forfeiture of the lease.

Each Investor was granted a 999-year lease of a specific Store Pod at a specific location shown on a plan of the building. The Investors were registered as owners of a long lease of the specific Store Pod at the Land Registry. Covenants provided that the Store Pods could be used solely “for the purpose only of storage and distribution use Class B8 of the Town & Country Planning (Use Classes) Order 1987”.

Investors had the option to enter a six-year lease back arrangement with the Appellant with a guaranteed return of 8 percent for the first two years. Investors also had an option to require the Appellant to buy back the lease after six years. Where the Investor leased back the Store Pod to the Appellant, the Appellant was entitled to exclusive possession for six years in exchange for rent, which, after deduction of charges, produced the guaranteed return of 8 percent.

In October 2017, HMRC assessed the Appellant for VAT due on the premiums charged for the grants of Store Pod leases, the annual service charges and ground rents payable under the terms of the Store Pod leases.

The substantive issue before the FTT was how the grant of a long lease of a Store Pod was correctly to be characterised for VAT purposes.

Judgment

The FTT began by noting that, when Item 1(ka) Group 1 Schedule 9 VAT Act 1994 “the grant of facilities for the self storage of goods; ...” was introduced in 2012, the consultation paper and other material published by HMRC clearly stated that the intention was to tax the supply of self-storage facilities to those wishing to store their property, and not to tax the sale or lease of a self-storage facility or warehouse to a self-storage supplier. So the FTT was able to rule out Item 1(ka) in the present case.

It then considered whether the Appellant was supplying immovable property. The Appellant was essentially arguing that the Store Pods were simply rooms in the building, or the equivalent of flats in an apartment block.

The FTT considered, from pictures provided, that the Store Pods looked like rooms in a building. It further found it crucial that the long leases were registered in the Land Registry, and so equated to the registration of a long lease for a flat. And it was clear that removing a Store Pod would destroy the asset, so the FTT concluded that they were immovable, and each Store Pod formed part of the building.

However, that was not sufficient to settle the matter. The facts that (i) the Store Pods were the subject matter of leases, and (ii) rent was paid, did not mean that the transactions automatically fell into art 135(1)(l) Principal VAT Directive (“the leasing or letting of immovable property”). The purpose of the exemption was to exempt “passive” leases. And the FTT considered that, whilst described as ‘leases’, it was effectively de facto ownership of the property which transferred to the Investor, and not the lease of immovable property.

The FTT considered that, looking objectively at all of the circumstances, the clear intention of both the Investors and the Appellant was to obtain an interest in a building which could then be utilised to generate income, and that was what the leases achieved. The fact that the Store Pods could only be utilised for self storage did not alter that. So the FTT decided that the Appellant was supplying a part of a building, which was exempt for the purposes of art 135(1)(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); ...”

The appeal was therefore allowed except to the extent, if any, that any Investor used a Store Pod personally for self-storage.

Commentary

This decision appears to accord with other analyses of property-related transactions, e.g., the sale of a hotel building, where it is necessary to distinguish the supply of the asset (in this case part of a building capable of being let out for self-storage) from the supply of the use of the facility itself (in this case the taxable supply of self-storage to the person wishing to store their property in the Store Pod).

This case can be contrasted with other scenarios, e.g., the line of cases concerning the letting out of hairdresser’s chairs, where a lack of exclusivity over occupation and a proliferation of supplies ancillary to that of the chair have often led the Tribunals and Courts to find that the supply is not “passive” and therefore falls outside the exemption.

This case, whilst not creating precedent, again highlights the complexity of property related VAT queries and underlines the importance of understanding exactly what is being provided before concluding on any VAT analysis.