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CRC v University of Huddersfield Higher Education Corporation, Upper Tribunal (Tax and Chancery Chamber)
The taxpayer university acquired the leasehold interests in two derelict properties that it wished to refurbish, but recognised the input tax on the costs would not be recoverable in full because it was partially exempt, being in the business of education.
The taxpayer entered into a mitigation scheme, establishing a discretionary trust over which it had control of the trustees. The university waived the exemption and granted a taxable 20-year lease of the properties to the trust at a notional rent.
The trust also waived exemption and granted an underlease of 20 years, less three days, to the university at a notional rent. The university’s subsidiary company, which was VAT-registered but not part of the university’s VAT group, charged the taxpayer £3.5m plus VAT for the building work.
The university had the ability to collapse the arrangement at any point. It claimed the input tax, which HMRC disputed on the basis the lease and underlease were not effective for VAT.
The appeal went first to the VAT tribunal, which referred to the Court of Justice of the European Union. Its decision (case C-223/03) [2006] STC 980) was followed by the First-tier Tribunal allowing the university’s appeal (TC2823).
The tribunal applied the principles in CRC v Weald Leasing Ltd (case C-103/09) [2011] STC 596, and concluded the leaseback arrangement had not been abusive.
The Revenue appealed to the Upper Tribunal, which found the tax mitigation scheme was an abuse of right, because it entitled the university to claim more input tax paid on the refurbishment work than it would have been able to had the work been regarded as directly and immediately linked to its general, largely exempt, supplies.
The judges decided the lease by the taxpayer to the trust and the underlease from the trust to the taxpayer should be disregarded, meaning the refurbishment ought to be treated as undertaken for the university’s general purposes.
HMRC’s appeal was allowed, and the department said the decision reinforced the use of the Halifax principle: the result of a landmark legal ruling (Halifax plc v CCE (and related appeals) (case C-255/02) [2006] STC 919) that recognised the EU principle of abuse of rights as applied to VAT.
