Three-Way Leasing Deal Legal, Court Says

Bratislava, 14. March, 2011 – The case concerned the British Churchill Group which predominantly supplies insurance services which are exempt from VAT. Three companies, CML, CARC and Weald Leasing, were accused of tax abuse by the British authorities. It seems that when CML or CARC needed new equipment, they turned to Weald Leasing. The assets were leased to a company called Suas Limited which in turn subleased them to CML or CARC. By resorting to that series of transactions CML and CARC avoided having to purchase directly the equipment they needed or pay in a single sum the total amount of non-deductible VAT on the purchases. The aim of those transactions was obviously to divide and spread the payment of purchase price of assets in order to defer the VAT liability, as CML or CARC would be liable to pay VAT only on the amount of rent relating to those assets, spread over the term of the leasing agreements. The British authorities raised VAT assessments disallowing the deduction by Weald Leasing of the input VAT paid on the assets leased arguing that the transactions in question were not economic activities and constituted an abuse of rights. The question referred to the Court was whether the lease and subsequent sublease resulting in the granting of accrual of a tax advantage would be contrary to the purpose of the VAT Directive. The Court found that the tax advantage accruing from an undertaking’s recourse to asset leasing transactions instead of the outright purchase of those assets does not lead to an abusive practice. The lease rather than the purchase of assets does not in itself result in the situation that the trader pays less VAT or deducts more VAT than that to which the trader is entitled. Thus while there may be cash flow advantages, there is no VAT saving in leasing rather than purchasing the assets. However, the contractual terms of those transactions, particularly those concerned with setting the rental levels, must correspond to arm’s length terms.