As the Bayeux Tapestry pays its visit to London, bringing with it the spirit of entente, it seems as good a time as any for a UK tax lawyer to discuss a recent decision of the European Court on VAT. Last week, the CJEU handed down its judgment in A&P Deco NV, a case concerning the never-straightforward question of the "transfer of a going concern" (TOGC) rules and how they apply where the transferor of a business is granting a lease.

In the UK at least, it has always seemed axiomatic that for TOGC purposes a "transfer" must be just that - a transfer of assets that are already held by the transferor, and not the creation of new assets by them. Some odd discrepancies arise from a rigid application of this concept: if a landlord transfers the freehold interest in a building subject to and with the benefit of a sitting tenant paying rent, they undoubtedly transfer a property rental business which is capable of being a TOGC; if instead they grant a 999-year lease at a premium with a peppercorn rent, they do not legally "transfer" anything, notwithstanding that from an economic and commercial perspective the two transactions are virtually indistinguishable. Indeed, this particular extremity of the rule - which was probably never wholly consistent with EU law - has been mitigated in the UK since the decision in Robinson Family Limited and HMRC's helpful - if somewhat arbitrary - acceptance that such a grant can qualify as a transfer provided that the transferor's retained interest represents no more than one per cent of the property, and the other relevant conditions are met (VTOGC6250).

What about the sale of a regular trading business operating from a premises owned by the transferor, where the various items of stock, assets and goodwill are transferred in the usual way, but with the transferor granting a commercial lease of the premises to the transferee - and so retaining the substantive freehold interest? This was the situation in Christel Schriever, where the German tax authorities took the view that the sale of the assets was not a TOGC as the related business premises had not been transferred outright. The CJEU disagreed, holding that it can be sufficient for the premises to be "made available" to the transferee - and that one can even have a TOGC where there is no lease granted by the transferor, provided that the transferee has appropriate premises available to them through some other means so as to be able to use the transferred assets to carry on a business.

The question in A&P Deco arose from similar facts, but was concerned with the status of the lease rather than the transferring assets (which, it was accepted, did constitute a TOGC). Did the grant of the lease form part and parcel of the TOGC along with the assets that were transferred outright, and therefore fall to be disregarded rather than treated as a separate exempt supply? The taxpayer in that case certainly hoped so, as that would avoid their suffering a clawback (under the capital goods scheme) of input tax on costs incurred in relation to the premises that would arise were they found to have made an exempt supply by granting the premises lease. Both the Advocate-General and the Court disagreed: it did not follow that, because a TOGC is still possible where the premises are leased rather than transferred outright, such leasing would itself be disregarded as part of the TOGC. Indeed, as the Court held, it would breach the principle of fiscal neutrality if the taxpayer here were to retain their full input tax deduction for costs incurred on an asset that was now being used to make exempt supplies.

While this is a helpful clarification of the law for our friends in the EU, it does not settle the position in the UK. In accordance with the European Union (Withdrawal) Act 2018, the courts and tribunals of the UK are not bound by the decision, but "may have regard to" it. HMRC are certainly known to pray in aid other non-binding post-withdrawal CJEU decisions, and would no doubt look to do so here in similar circumstances. UK taxpayers would therefore be well-advised to have this decision in mind when buying or selling a business.