Fabian Barth explains which VAT treatment applies to the most common types of transfers of beneficial proprietary interests.
English law, for historical reasons, distinguishes between two types of ownership: legal and beneficial. The latter type is of particular relevance in the context of land and certain financial instruments, but can apply in principle to anything that is capable of being owned.
If a business transfers a beneficial interest, the question arises: which VAT treatment applies?
Beneficial interest in tangible movable property
Normally, where tangible movable property is sold (i.e., full title therein is transferred), the seller effects a supply of goods, and the VAT treatment follows accordingly. However, the transfer of the full legal title is not a necessary condition for making a supply of goods. The test is a different one. In the case De Fruytier (C-237/09) [2010], the Court of Justice of the European Union condensed its case law on the question as follows:
“[The] concept of supply of goods does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were its owner” (at [24], emphasis added).
The critical words in this passage are “as if”. Accordingly, the power to dispose of goods for VAT purposes vests in the person who (legal owner or not) has a right to control the asset in the same manner as a legal owner normally could.
In the context of beneficial ownership, applying this test provides the answer as to when a beneficial owner of tangible assets can make or receive a supply thereof:
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Often, there is only one beneficial owner who is unconditionally entitled to possess, use, sell or even destroy the asset. This is typical in scenarios where assets are held on trust by another legal owner for regulatory or insurance reasons only (one of these cases was considered in Eastern Atlantic Helicopters Ltd v HMRC [2016] 277 (TC)). Then, there can be no doubt that for VAT purposes, it is the beneficial owner who disposes of the asset “as if” they were the owner. They thus make and receive a supply of goods when purchasing or selling their interest.
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On the other hand, there may be arrangements where the beneficial interest in the asset is either not exclusive (i.e., beneficial ownership has to be shared with someone else) or not absolute (e.g., the beneficial interest only allows for use of the asset but not its disposal, etc.). Such a beneficiary’s rights fall short of those enjoyed by a full owner. Therefore, the beneficiary does not dispose of the asset “as if” they were its owner. The transfer of such an interest is accordingly incapable of qualifying as a supply of goods, but rather constitutes a supply of services.
In summary:
Beneficial interest in intangible property
Because the VAT concept of a ‘supply of goods’ is limited mostly to tangible physical goods, a sale of any intangible property qualifies as a supply of services (VATA 1994, s 5(2)(b)). Therefore, it is in practice initially less relevant whether one transfers full ownership of such an asset or ‘only’ beneficial interests therein – a supply of services (as opposed to a supply of goods) takes place in any event.
However, certain forms of intangible property are subject to special VAT rules:
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The transfer of copyrights, patents and other intellectual property to a person not in business is subject to a special place of supply rule and (in deviation from the general rule) outside the scope of UK VAT if the recipient is located outside the UK (VATA 1994, Sch 4A, para 16(2)(a)).
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Many financial instruments (such as securities like shares) are exempt from VAT when transferred pursuant to VATA 1994, Sch 9, group 5.
Do these special rules also apply when transferring beneficial ownership of the assets covered by them? The answer again depends on the extent of the rights conveyed by the beneficial interest to its holder. Exclusive beneficial ownership for all practical purposes is as good as full title and therefore treated in the same manner as such for VAT purposes. This should be fairly uncontroversial, since, for example, holders of shares in bank depots frequently enjoy ‘only’ beneficial ownership, yet nobody would doubt that their transfer is similar to that of full legal title.
The further the beneficial interest falls short of being similar to full ownership, the more likely it constitutes a right of a different type. That right, then, has to be assessed independently against the respective potentially pertinent special VAT rules on a case-by-case basis.
Example: Trust of company shares
Under a trust of ordinary company shares, a beneficiary has the right to receive the income generated by the shares (i.e., the dividends).
Analysis: The beneficiary’s rights fall short of those enjoyed by a person with full ownership of such shares (for example, because ordinary shares include voting rights which the beneficiary does not enjoy). A transfer of that beneficial interest could not be equated for VAT purposes to a transfer of the same shares.
However, looking at the specific characteristics of that beneficial interest, one can see that it is tantamount to any other instrument conveying the right to receive dividends (e.g., non-voting shares). Because the transfer of such secondary securities is also covered by the VAT exemption (a right to receive dividends suffices for the exemption pursuant to Granton Advertising (C-461/12 [2014] at [31]), the transfer of the beneficiary’s rights (if they sold them in the course of a business) would be VAT exempt, too.
Beneficial interest in land
In land, it is very common for there to be beneficial or equitable interests. One reason is that TA 1925, s 34 allows only up to four legal owners of estates such as freehold and leasehold.
Whether the transfer of an interest in land constitutes a supply of goods or services is academic – if the land is located in the UK, the transaction can fall within the scope of UK VAT; if it is located elsewhere, the transaction will be outside its scope (for goods: VATA 1994, s 7(2); for services: Sch 4A, para 1).
The most potent equitable right one can hold in land is a beneficial freehold or leasehold estate. Because such estate conveys to the holder a right to exclusive occupation, its granting or transfer is no doubt exempt from VAT (Veronsaajien oikeudenvalvontayksikkö (C-215/19) [2020] at [40]).
Domestic law, however, goes much further than that and exempts from VAT ‘any interest in or right over land’ (VATA 1994, Sch 9, group 1, item 1). Taken at face value, that would mean that any proprietary right in land, legal or equitable, comes within the exemption. An example would be a restrictive covenant (e.g., a binding assurance by one landowner to an adjacent land’s owner not to use their land for a purpose other than as a private dwelling). Such covenants are normally interests in land because they run therewith (LPA 1925, ss 78 and 79), and equitable because they cannot be protected as legal rights (LPA 1925, s 1(3)).
According to binding assimilated case law from the Court of Justice of the European Union, however, the exemption would technically be limited to exclusive occupational rights. However, HMRC’s policy is more generous and allows for the exemption for non-occupational interests, too (VAT Notice 742, s 10.6).
Practical tip
When granting or selling a beneficial right in the course of a business, for VAT purposes it is helpful to apply a two stage test: (1) Are the rights vested in the new beneficiary such as to put them in a position that in practice is tantamount to that of a person with full ownership, in terms of control, use etc.? If so, the VAT treatment will be the same as if full title had been transferred. (2) If the rights fall short, one must assess what exact bundle of rights the beneficiary will obtain, and then check whether these rights (not the full asset as such!) fall under any special place of supply rules or exemptions or zero ratings.
