Mills & Reeve has won a major victory over HM Revenue and Customs after a five-year VAT battle through the courts on behalf of Newnham College, Cambridge.
The firm's "skilfully prepared and carefully executed plan" to save the college £1.3 million in VAT was backed by the House of Lords, which handed down judgment in favour of Newnham at the end of the long-running legal battle.
The law lords ruled that the college had properly taken advantage of a structure which allowed it to recover the tax on building a new library – a rare victory for a VAT-saving scheme.
Ted Powell, partner in the tax team at Mills & Reeve, said the judgment was a major triumph for the college after five years and three legal hearings.
"In 2001 we put in place arrangements to mitigate the VAT costs on the construction of the college's £7.5 million library, leasing the new library building to a subsidiary company which then provided the hire of books back to the college for its members," he said.
"The House of Lords described the plan as skilfully prepared and carefully executed, but in 2003 HM Revenue & Customs challenged the arrangements and denied the college the recovery of its VAT costs on construction."
The issue was fought on the definition of "occupation" – HMRC claimed the college was in occupation of the building and therefore had to pay the VAT.
But its determination to fight the case through the courts, even in the wake of a decisive victory for Newnham College in the Court of Appeal two years ago, ended in another failure for HMRC.
"This was a perfectly lawful and proper thing for the college to do, particularly as it is a charity with a duty to protect its assets – which includes making sure it doesn't pay more tax than it needs to.
"We approached HM Revenue and Customs as long ago as 2000 to seek their confirmation of the effectiveness of the arrangements the college was putting into place. With a little more flexibility on HMRC's part a great deal of public money could have been saved."
The Bursar of Newnham College, Mr Ian du Quesnay, said the victory was an important one for the college.
"We are delighted finally to have won this victory over a very significant sum of money. The careful planning allows us to put well over £1 million to the support of education, learning and research. We are grateful to our legal team for the support and expertise they have provided throughout this protracted contest."