© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
H4. Land and
buildings
GENERAL
Services or goods
- Distinguishing operating lease and finance lease: substantially all risks and rewards pass
“[28] It is clear from the Court's case-law that an operating lease must be distinguished from a finance lease, the nature of the latter being that substantially all the risks and rewards of legal ownership are transferred to the lessee. The fact that a transfer of ownership is provided for on the expiry of the contract or the fact that the present value of the lease payments is practically identical to the market value of the property constitute, separately or together, criteria which permit a determination of whether a contract can be categorised as a finance lease (see, to that effect, judgment in Eon Aset Menidjmunt, C 118/11, EU:C:2012:97, paragraph 38).” (NLB Leasing C-209/14)
- Long lease of immoveable property: supply of goods if value of lease payments practically identical to market value
“[30] Accordingly, where a financial leasing agreement relating to immovable property provides either that ownership of that property is to be transferred to the lessee on the expiry of that agreement or that all the essential powers attaching to ownership of that property are to be enjoyed by the lessee and, in particular, substantially all the rewards and risks incidental to legal ownership of that property are transferred to the lessee and the present value of the amount of the lease payments is practically identical to the market value of the property, the transaction resulting from that agreement must be treated as an acquisition of capital goods.” (NLB Leasing C-209/14)
See also the case law on payment for a lease being linked to the passage of time, which is not the case for a long lease at a premium equal to market value
- Equivalence of transfer of freehold and long lease
“[77] … In substance the assets which constituted the core of the lettings business were transferred with the transferor retaining only a notional interest (ie. the reversionary interest of 3 days) but otherwise disposing of the economic activity which was to be carried on from or in relation to that Unit.
[78] As I have mentioned above, the transferor did, in addition, retain a small economic interest (in effect a profit rent). The Tribunal does not find that that in any way alters the substance of what was happening. It is true that the payment of the profit rent would have to be factored in as an expense of the business being carried forward by the transferee, but it does not impact on the substance of what was happening.” (Robinson Family Limited v. HMRC [2012] UKFTT 360 (TC))
“A Ltd owns the freehold of a building valued at £1m which A Ltd rents out commercially. A Ltd sells that property rental business by granting to B Ltd a 999 year lease under which A Ltd is entitled to receive a ground rent of £100 each year. The value of that right, together with any and all other rights retained by A Ltd, is £2,000. Provided all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2 per cent interest retained as too small to disturb the substance of the transaction.” (Brief 30/2012 and see also Brief 27/2014)
SUPPLY OF BUILDING
The exemptions
- EU law
"(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);" (Article 135(1))
Meaning of building
- No building supplied where partially demolished building + services of demolition supplied by same person
"[40]Consequently, the supply of land on which a dilapidated building still stands, which must be demolished so that a new building can be constructed in its place and demolition of which had already begun before that supply took place, and also the demolition of that building must, in circumstances such as those described by the referring court, be considered to form a single transaction for VAT purposes, having, taken as a whole, the aim of supplying not the existing building but land that had not been built on." (Don Bosco C-461/08)
SUPPLY OF LAND NOT BUILT ON
- Supply of land which has not been built on (other than building land)
"(k) the supply of land which has not been built on other than the supply of building land as referred to in point (b) of Article 12(1);" (Article 135(1))
- Purpose: only land which has not been built on and is not intended to support a building
"[43] In that respect, it must be recalled that, taking into account the express reference, in Article 4(3)(b) of the Sixth Directive, to the Member States’ definitions of building land, it is for the Member States to define what land is to be regarded as being building land, for the purposes of the application both of Article 4(3)(b) and of Article 13B(h) of the Sixth Directive, while having regard to the objective pursued by Article 13B(h), which seeks to exempt from VAT only supplies of land which has not been built on and is not intended to support a building (see, to that effect, Gemeente Emmen, paragraphs 20 and 25)." (Don Bosco C-461/08)