VAT ruling to claw millions from Revenue

IT IS not often that businesses get one over on the VAT man. So Lubbock Fine, the City of London accountancy firm, is understandably delighted to have won the backing of the European Court of Justice for its stand on the surrender of leases.

Customs and Excise says it is planning to comment on last week's ruling tomorrow. Meanwhile, tax specialists say it is definitely a reverse for the commissioners that will inevitably mean a change in the law.

As a result, the Government faces hundreds of claims totalling millions of pounds from companies that were charged VAT on surrender payments for commercial leases - in contravention of European Union law. As Alan Cushnir, the Lubbock Fine partner who led the fight, said: 'Now any registered trader who had protected their position correctly should be able to recover any output tax they may have paid on proceeds of surrender.'

The case arose after Lubbock Fine refused to pay pounds 110,000 in VAT on a sum it received for leaving its offices seven years early, in 1990.

Since 1989, money paid by a landlord to a tenant to give up a lease before it expired had been subject to the tax. But the accountancy firm argued that this was contrary to EC law and to the general principle of VAT.

Last summer, the firm heard that the European Advocate-General had recommended to the European Court that the UK position was unlawful. Because such advice is rarely ignored, the firm was hopeful of changes in last month's Budget. It has a little longer to wait, but is still pleased by the outcome.

In particular, it welcomes the fact that the victory resolves a 'fundamental issue of natural justice' by putting surrenders and assignments of commercial leases on the same footing as far as VAT is concerned.

Indeed, the different treatment of assignments enabled some companies to get around the problem. They could avoid paying the tax by assigning the lease to another company rather than giving it up directly.

Nevertheless, Peter Jenkins, VAT partner with Ernst & Young, the accountants, said the ruling would make life simpler. 'It removes a nuisance and a trap,' he said.

While accepting that the law would have to be changed, Mike Arnold, a VAT partner at accountants Price Waterhouse, was less certain that life would be easier in the short term. He said there could be some complications before the issue was settled by legislation.

However, it could have been worse. The imposition of VAT on these transactions almost coincided with the downturn in the property market. As a result, tenants, rather than landlords, are mostly paying for surrender - and that is subject to different rules.