Tax advantage was the sole aim

Lease and leaseback arrangements to enable input tax claim

A university acquired the leasehold interests in two derelict properties that it wanted to refurbish but recognised the input tax on the costs would not be recoverable in full because it was partially exempt. It entered into a mitigation scheme establishing a discretionary trust over which it had control of the trustees. The university opted to waive the exemption and granted a taxable 20-year lease of the properties to the trust at a notional rent.

The trust also waived the exemption and granted an underlease of 20 years less three days to the university at a notional rent. A subsidiary of the university which was VAT-registered but not part of the VAT group charged the institution £3.5m plus VAT for the building work and the university claimed the input tax. The creation of the trust...