The High Court has dismissed an appeal by three partners over VAT assessments on the sale of 15 holiday homes they developed at Baltimore, Co Cork. The court ruled that lease and leaseback arrangements made before the sales were ineffective for VAT because the partners lacked the bank’s prior written consent. It also found the arrangements had no commercial reality and were an abusive practice under European law.
The case reached the High Court as a case stated by Circuit Court Judge Harvey Kenny, asking for rulings on questions of law. The partners had lost before an Appeal Commissioner and in the Circuit Court. The High Court’s judgment, delivered by Mr Justice Charleton on 11 June 2008, dismissed their appeal from the Circuit Court decision.
The partners built the houses for sale and had borrowed from ACC Bank, which held a mortgage over the land. The mortgage prohibited leasing or otherwise disposing of the secured property without the bank’s prior written consent. In March 2002, the partners leased the houses for 20 years and one month to Shamrock Estates Ltd, a connected company, which immediately leased them back for two years. Both leases were surrendered. The partners then sold the houses freehold. They had accounted for €40,000 VAT on the long lease and claimed that the arrangement meant the later sales were exempt from VAT.
The Circuit Court had held that the long lease was valid, but that the arrangement was abusive and the sales were subject to VAT. The High Court disagreed with the Circuit Court on the lease’s validity: it held the leases void because the bank had not given the required prior consent. It said the partners were liable for VAT on the freehold sales as if the lease, leaseback and surrenders had not occurred.
The High Court also upheld the Circuit Court’s conclusion on abusive practice. It relied on findings made after the Circuit Court heard evidence, including that the transactions had no commercial purpose beyond reducing VAT and did not change who occupied the homes. The High Court said the arrangement should be redefined for VAT to reflect the underlying reality, even if the leases had been valid.
The court did not decide whether interest was payable on late VAT. It said that question was for the Inspector of Taxes and had not been before the Circuit Court. The judgment therefore did not rule on whether interest would be a penalty.