University loses tax avoidance case

HMRC has successfully appealed a decision of the First-tier Tribunal that originally found in favour of the taxpayer. The case concerned the refurbishment of a derelict mill by the University of Huddersfield. In 1996, the University began working on a site known as East Mill that the University ultimately redeveloped to house its School of Computing and Engineering. The financial arrangements to fund this work involved a complex lease and leaseback arrangement with a discretionary trust and both parties opted to tax the derelict mill.

HMRC argued that the only purpose for the establishment of this complex arrangement was to reduce the VAT costs of refurbishing university property. The scheme deferred the VAT charge over the life of the leases and was intended to create an absolute saving by collapsing the leases early. The leases collapsed in 2004. If the scheme had not been entered into, the University would only have been able to recover a small proportion of the VAT charged on construction costs using a calculation known as the partial exemption recovery rate.

Although the First-tier Tribunal has many sympathies with HMRC’s position and was clear that from the outset it was the University’s intention to make an absolute tax saving, the First-tier Tribunal ultimately found in favour of the taxpayer. HMRC appealed to the Upper Tribunal who decided that the scheme was artificial and abusive and, as a result, the lease and leaseback transactions should be ignored for VAT purposes.

Commenting on this decision, Jennie Granger, Director General Enforcement & Compliance, HMRC, said:

‘This case offers further evidence that HMRC pursues those who avoid tax and won’t hesitate to litigate if a satisfactory settlement can’t be reached through discussion. The Upper Tribunal’s ruling also backs a key argument used by HMRC to tackle abusive VAT avoidance. Anyone tempted by avoidance schemes should think long and hard because we have a great record in defeating them in the courts.’

A spokesman for the University commented that ‘the university has the right to request leave to appeal the latest decision of the court in favour of HMRC and is currently considering its options.’

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