Tag Archives: Taxation

VAT: DIY Garage part of single continuous building project

In the case of many DIY house building projects, work is not undertaken all day or every day. Work may take place in bursts, with gaps in between. There is no limit to the amount of time that a DIY project can take. However it is not in anyone’s interest to artificially extend the time taken to complete a DIY project. The full nominal amount of the VAT paid can only be claimed at the end of the project, by which time it will be significantly less in real terms than it was at the time the self builder originally paid the invoices.

In the First-tier Tribunal (Tax) case of Bowley v Revenue & Customs [2015] the appellant had built a house, and an associated garage block and other works. The appellant claimed a refund of VAT outlaid on the construction costs under the DIY House Builders Scheme, operated under section 35 of the Value Added Tax Act 1994 (“VATA”). HMRC refused the claim because the claim had not been made within 3 months after construction of the building was complete, as required by s 35(2)(a) VATA and regulation 201 of the VAT Regulations 1995. Site excavation for the separate garage block commenced in April 1993. The dwelling had been completed on 22 June 1994, so the claim should have been submitted by 22 September 1994. A delay in the construction of the garage block was not an acceptable reason for the delay as a garage block could only be included as part of a claim if it was constructed at the same time as the dwelling. In fact the reinforced floor slab for the garage block was not laid until 30 September 1994.

The appellant countered that the dwelling and the garage block were a single project. The claim had been made within 3 months of completion of the garage block and retaining walls to the property, which had completed the whole project.

The Tribunal said it was not fatal to the appellant that the garage was the subject of a separate planning consent. Planning permission for the garage had been applied for almost a year and a half before the house was completed, and had been granted more than 12 months before the house was completed. The plan had originally been for the house to have an attached garage. The decision to have the garage separate from the house instead was a change in plans during the course of construction. It did not mean that the detached garage was necessarily a new project, as opposed to just a change in the original project.

The Tribunal said a dwelling and a garage will be “constructed … at the same time” under Note (3) to Group 5 of Schedule 8 VATA, if they are both built as part of a single continuous building project. If there is a single continuous building project, it should not make any difference in what order work is undertaken on different components of the project. Work on some components may be started or finished in advance of others. It should not matter if one component is built first and then the next component built immediately thereafter, or if there are significant gaps between bursts of activity, provided that the project can overall still be characterised as a single continuous building project.

The appellant conceived the house and the garage as a single project. So the question was whether there was a gap in time between completion of the house and the construction of the garage such that in practice they were not built as a single continuous building project?

Preliminary groundwork for the garage had already been undertaken before the house was completed. The rest of the work on the garage followed on immediately after completion of the work on the house. Both house and garage were constructed as a single continuous building project.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Input tax on goods sold Pre VAT registration: was input tax recoverable?

To what extent can a business make a claim to offset input VAT incurred on supplies which it received for the purpose of its business prior to being registered for VAT?

UK law, which restricts a non-registered trader from claiming input tax incurred prior to registration, is based on the EU Principal Directive (2006/112 EC).

The Schemepanel Trading Limited v Customs & Excise Commissioners [1996] case concerned supplies made to a building contractor, in the form of staged supplies during which time the taxpayer became VAT registered.

The taxpayer claimed input tax on supplies made and used by it before VAT registration, based on it being unnecessary to be VAT registered at the time when supplies were used in order to reclaim input tax.

It was held, by reference to higher decisions including Customs & Excise Commissioners v Apple & Pear Development Council [1985] and BLP Group plc v Customs & Excise Commissioners [1995] that it is a basic principle of VAT that input tax can only be deducted in respect of supplies which are subject to output tax: they have to be “the cost components” of the supply on which output tax is charged.

This is based on the fundamental principle of VAT that input tax should only be claimed to the extent that it can be attributed to the making of taxable supplies, so supporting the principle of fiscal neutrality.

Regulation 111 of VAT Regulation SI 1995/2518, (the “VAT Regulations”) also reflect this principle but within certain limits allow that there can be a time lapse between the receipt of supplies and the making of supplies by a taxable person. But that regulation can have no application where goods have been bought and sold before registration.

In Earl Redway (t/a Loktonic) v Revenue & Customs (VAT – SUPPLY : Pre-registration) [2015] Mr Redway’s on-line business was registered for VAT on 4 January 2014. Mr Redway claimed input VAT relating to goods bought before 4 January 2014. HMRC allowed a percentage of that claim on the basis that some of those goods had been bought but not sold prior to 4 January 2014 and so could be treated as “stock in hand” at the time of registration. Input tax for such “stock in hand” could be re-claimed under Regulation 111 of the VAT Regulations. However they refused any input tax re-claim for goods which had been bought and sold before registration.

The supplies for which he was claiming input tax had not been used to make taxable supplies, they had been used to make supplies while Mr Redway was treated as exempt from VAT prior to registration.

The goods to which the disputed input VAT related had been both bought and sold before Mr Redway’s VAT registration for VAT. None of them could be treated as “stock in hand” at the date of the VAT registration.

Those supplies did not form part of any kind of taxable supply made by Mr Redway so the exceptional time limits in Regulation 111 did not apply.

So the input tax could not be re-claimed. For these reasons HMRC’s refusal to repay input VAT was confirmed.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Stallholders’ pitch fees at comprehensively organised trade fair subject to VAT

In the First-tier Tribunal (Tax) case of International Antiques and Collectors Fairs Ltd v Revenue & Customs (VAT – EXEMPT SUPPLIES : Land) [2015] various site owners up and down the country normally granted the Company five year licences to use their properties to hold antiques fairs on agreed dates, on an exclusive basis.

The antiques fairs were large scale events which the Company’s marketing materials described as some of the biggest and best attended of their kind in Europe – which clearly required extensive and expert organisation. It took almost 90 staff at Newark and over 40 at Ardingly. Each Exhibitor paid for the benefit of a fully organised fair provided by the Company.

The Company performed all organisation of the fair, including stewards, first-aiders, cleaners, security, parking marshals, electricity, some police attendance, and some availability of banking facilities.

The Company also undertook prior advertising in both trade publications and the local press. This involved one full-time employee, one PR consultant, two other consultants, a graphic designer and two bloggers.

The Tribunal said that the Company’s supply to an Exhibitor was not “a relatively passive activity linked simply to the passage of time and not generating any significant added value”.

In fact, the Company’s activities in organising and running the fair did generate significant added value and were “other activities which are … commercial in nature, … or have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property”.

The test was “whether the contracts, as performed, have as their essential object the making available, in a passive manner, of premises or parts of buildings in exchange for a payment linked to the passage of time, or whether they give rise to the provision of a service capable of being categorised in a different way”.

The economic and social reality was that the over-arching single supply by the Company was not to be treated as a supply of a licence to occupy land, but rather a supply of the opportunity to participate as a seller at an expertly organised and expertly run antiques and collectors fair, one element of which was the provision of the pitch. Accordingly, the correct VAT treatment of the booking fees was a standard rated supply.

The VAT treatment of the supply was self-evidently standard rated once it was established that the other service elements were not ancillary to the provision of the licence.

That was sufficient to decide the appeal against the Company.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Business transfer a TOGC despite Group’s exclusive call on transferee

In order to be a transfer of a business as a going concern (“TOGC”) so as to be relieved from VAT the assets transferred must together constitute an undertaking capable of carrying on an independent economic activity. This is quite different from a mere transfer of assets.

In the Upper Tribunal Tax and Chancery Chamber case of Intelligent Managed Services Limited – v- HMRC [2015], HMRC claimed that the transfer of Intelligent Managed Services Limited (“IMSL”)’s banking support services business, comprising business assets and staff, to Virgin Money Management Services Limited (“VMMSL”), was not a “transfer of a going concern”, so that the transfer constituted supplies of goods and services that VAT should be charged on.

VMMSL were a member of the Virgin Money Group (“VMG”) VAT group.

At the time of transfer to VMMSL IMSL’s business was the business of owning, maintaining,
operating, using, developing and supporting an information technology infrastructure and know how for use by others in banking support. IMSL had developed a banking platform (“banking engine”) for banking processing services for banks.

Following the transfer of the business, VMMSL carried on the same type of business providing banking processing services to another member of the VMG VAT group, Virgin Money Bank Limited (“VMBL”), which provided retail banking services to retail customers. The processing services provided by VMMSL were added into the retail banking services offered by VMBL, which comprised retail banking products, accounts and payment processing services, for which the banking engine was essential. VMMSL only provided services to group companies.

The question was whether the fiction created by the VAT group rules, i.e. that of the single taxable person carrying on that business, in combination with the other businesses of the group, meant that the VMG VAT group was not to be treated as using the assets transferred in carrying on the same kind of business as required of any business successor by the TOGC rules.

The tribunal said that the mere fact that the business transferred was to be carried on, not as a stand-alone business, but as part of the existing business of the group could not make a difference. That was clear from the terms of Article 5(1)(a)(i) of the Value Added Tax (Special Provisions) Order 1995 (“SPO”) itself.

By virtue of the single taxable person fiction, as applied by Section 43(1) Value Added Tax Act 1994 (“VATA”), the group was to be treated as carrying on all the businesses carried on by group companies.

But that fiction did not change the nature of those businesses. They remained separate businesses as a matter of fact.

The fiction did not extend to treating the group as carrying on a different, amalgamated, business in which the separate businesses of the group lost their individual identity.

This was the case whether or not those individual businesses themselves made supplies outside the group. The treatment of such supplies was dealt with separately by Section 43(1)(b) of VATA.

Nor could the position be affected by the fact that Section 43(1) of VATA caused VMMSL’s supplies within the group to be disregarded. Although the VAT effects of those supplies were to be disregarded, the activities of VMMSL and the intra-group transactions it made were not.

The effect of VMMSL being within the VMG VAT group was that it was the group, as the single taxable person, that was treated as the transferee, and it was the group that was treated as carrying on each of the businesses of the group members, but none of the statutory disregards could alter the fact that the group, in combination with its other businesses, continued to use the assets transferred in the same kind of business as that formerly carried on by IMSL.

Accordingly, the transfer by IMSL of the assets of its business to VMMSL satisfied the conditions of Article 5(1) of the SPO, and those supplies were therefore to be treated as neither a supply of goods nor a supply of services and relieved from VAT under the VAT TOGC rules.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

VAT Election notified too late to get TOGC Relief

The condition in Article 5(2A)(a) of the VAT (Special Provisions) Order 1995 requires not only that an option to tax has been exercised by the transferee on or before the relevant date but also that notification of that option has been given to HMRC on or before the relevant date. There is no provision to extend the time for that notification.

Where notification is given within the appropriate time limit the option may take effect from the date on which it was exercised. To that extent, and only to that extent, can the notification operate retrospectively.

In the First-tier Tribunal (Tax Chamber) case of Nora Harris v HMRC (2015) Mrs Harris was the Landlady of a Hairdressing Salon. She had opted to charge VAT on the rent. On 1 August 2011 she sold the building to her daughter.

Her daughter had got herself VAT registered in time so had her daughter opted to charge VAT on the property and notified the election to HMRC by 1 August 2011 the sale would have been treated as VAT neutral under the Transfer as a Going Concern VAT relief rules.

Unfortunately she had done neither and her efforts to notify a late election to HMRC were totally undermined because the tribunal ruled that the requirement to notify her VAT election to HMRC before the completion of her purchase was mandatory and that her failure to do so was fatal to the validity of her VAT election and would have been so even if her actual election had been made before completion of the purchase from her Mother.

In fact Mrs Harris’ daughter knew nothing about the relevant VAT rules and even her election to charge VAT was merely inferred from the fact that she charged VAT to the tenant after buying ownership of the freehold from her Mother.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Additional accommodation for visitors disqualified flat cost from business deduction

Section 34 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) prohibits certain expenses from being deductible in calculating income tax:

“34 Expenses not wholly and exclusively for trade and unconnected losses

(1) In calculating the profits of a trade, no deduction is allowed for–

(a) expenses not incurred wholly and exclusively for the purposes of the trade, or

(b) losses not connected with or arising out of the trade.

(2) If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.”

The First-tier Tribunal (Tax) Tribunal case of Healy v Revenue & Customs (Rev 1) [2015] concerned the Cheshire based geordie actor Tim Healy and his efforts to get certain costs of his multi bedroom London flat deductible against tax. He had taken the flat when he had taken a London role as commuting from Cheshire would have been impossible.

The Tribunal said it had to consider the actor’s intentions at the time that he entered into the tenancy agreement. The actor had said that he knew “how massive the show would be” and that he “needed space” for people who would want to come to visit.

This was fatal to his relief claim as from the outset the actor was seeking to secure space for visitors as well as for himself, and that had been a consideration when deciding which particular flat to rent.

For the purposes of Section 34(1) of ITTOIA, this was an independent purpose, and that the expenditure on the flat thus had a dual purpose of enabling the actor to perform his duties under the performer’s contract, as well as enabling him to receive visitors in London.

That latter purpose was not a business purpose and the fact that the three bedroom flat cost no more than a hotel was immaterial.

For the purposes of Section 34(1) ITTOIA, the question was whether the expenditure had a dual purpose, not whether there was additional expenditure in order to meet an additional purpose.

That dual purpose meant that the “wholly and exclusively” test in s 34(1) ITTOIA was not satisfied.

In fact, no item of identifiable expenditure, relief was claimed for in the Appeal, had met the requirement of being incurred “wholly and exclusively” for the business purpose.

Had the expenditure been incurred to meet the actor’s ordinary needs for warmth and shelter for purposes not merely ancillary to his business purpose that would also have disqualified it from relief as well but the objective of entertaining visitors was sufficiently disqualificatory to make it unnecessary for the Tribunal to reach a view on that.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

VAT: University building was extended rather than continued so no zero rating

Section 30(2) of Value Added Tax Act 1994 (“VATA”) provides that a supply of goods or services is zero-rated if the goods or services are of a description for the time being specified in Schedule 8 VATA.

Item 2 in Group 5 of Schedule 8 VATA specifies:

The supply in the course of the construction of:—

(a) a building … intended for use solely for … a relevant charitable purpose …

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.

Note 16 to Group 5 provides as follows:

For the purpose of this Group, the construction of a building does not include:-

(b) any enlargement of, or extension to, an existing building …”

In the First-tier Tribunal (Tax) case of York University Property Company Ltd v Revenue & Customs [2015] it was decided to build a chemistry building in two phases due to an initial lack of funds to complete the whole building. At the time phase 1 was completed, it was not known when phase 2 would be completed.

Phase 1 was a three-storey building shaped like a rectangle, with a sacrificial wall on one of its short sides.

A donation was made to the University, in 2010, enabling phase 2 to be completed. The University wanted the phase 2 works to be zero rated for VAT.

Phase 2 was in the same style and was of similar size and shape to phase 1, and was joined to phase 1 where the sacrificial wall previously stood.

Following completion of the phase 2 works, there was one single three-storey rectangular building that was double the length of the phase 1 construction. Without looking closely at the building it would now be impossible to tell that the two parts of the building were constructed at different times.

There was no disagreement between the parties that both the phase 1 and phase 2 works related to “a building … intended for use solely for … a relevant charitable purpose” within the meaning of this provision, and HMRC accepted that the phase 1 works fell to be zero-rated on that basis.

Of the precedent cases there had been only one where a second phase of works was found to be a continuation of the original development rather than an extension to a completed building.

The tribunal said the fact that the phase 1 construction contained a sacrificial wall in anticipation of the phase 2 works was of marginal relevance.

In one of the precedent cases the first phase single storey wing included foundations and steel beams of sufficient strength to support the additional storey to be added in phase 2, but this had not affected the tribunal’s conclusion that it was an enlargement of an existing building rather than a continuation.

The only precedent case at all supportive of the University’s argument, that phase 2 was a continuation, was different as it had rested on the finding that the kitchen and laundry block built in the second phase (included in the planning consent) was integral to the development, in that the hospital could not function without it. There had been only an 18 month gap between completion of the first phase and the commencement of the second phase. Moreover, in that case the Commission for Social Care Inspection had required that the kitchen and laundry facilities be built, and had granted an extension of time for that to be done.

In this case the Chemistry Department’s vision could not be achieved until phase 2 was completed, but there was no suggestion that the phase 1 construction could not function and be used for chemistry research until phase 2 was completed.

Phase 1 did so function, as did the Chemistry Department as a whole, for some 9 years until phase 2 was completed in 2013.

Phase 1 could have continued to so function indefinitely, without phase 2. There was no suggestion that any public authority required phase 2 to be completed within any stipulated timeframe, or at all.

So phase 2 of the building was, for purposes of Item 2 in Group 5 of Schedule 8 VATA, an enlargement of or extension to phase 1, rather than a continuation of the original development of the building and so not eligible for zero rating.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

VAT wrongly invoiced and paid could be recovered from HMRC direct

It sometimes happens that VAT is invoiced by a supplier and paid by a customer, where it should not have been, and the supplier duly pays the VAT over to HM Revenue and Customs (“HMRC”).

HMRC are not allowed to refund the VAT to the supplier, who charged it, where that would “unjustly enrich” that supplier.

Nor would it be right to restore the VAT to the customer if the customer has, in fact, already recovered the amount of the VAT as input credit against the VAT it has charged the “end user”.

In the EU Court of Justice case of Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze [2008] it was recognised that there may be special circumstances where the customer or the end user should have the right to reclaim the wrongly paid VAT back direct from HMRC.

This was endorsed in the UK courts in the Court of Appeal decision of Investment Trust Companies (In Liquidation) v The Commissioners for Her Majesty’s Revenue and Customs [2015] .

In the recent High Court case of Premier Foods (Holdings) Ltd, R (on the application of) v HM Revenue and Customs & Anor [2015] those circumstances where that the supplier had gone into administration so that any refund to the supplier would have been shared by all the creditors of that company, and not just gone back to the out of pocket customer.

The court found those circumstances sufficient to warrant the customer being able to reclaim the wrongly paid VAT direct from HMRC.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Non client customer could not recover VAT on invoices

Section 26 of the Value Added Tax Act 1994 allows a taxable person to reclaim ‘input tax’ attributable to the supplies of taxable services by that person.

Third parties often reimburse costs in property transactions and issues arise as to whether they are entitled to a VAT invoice from the original supplier.

In  the First-Tier Tribunal (Tax Chamber) case A Partnership v HMRC [2015]  D,  a former partner of an accountancy firm was seeking dissolution of the partnership.

One of the 3 continuing partners, C,  was taking independent legal advice about this and was invoiced for this.

The other two continuing partners, A and B had been taking independent legal advice to defend that and a claim of bad faith.

HMRC refused to allow the successor accountancy firm to recover the VAT charged on those invoices,

The tribunal agreed that the recovery of VAT is limited to VAT on supplies “to” the taxpayer seeking repayment.

The taxpayer here was the new partnership, but the services of the solicitors were not supplied to the partnership.

The VAT which the appellants sought to recover was not input tax belonging to the new partnership. It was not incurred on a supply made ‘to’ the new partnership and the new did not hold VAT invoices addressed to it.

It was not enough to show that the successor partnership of Messrs A,B and C benefited from the solicitors’ services. The law required the new partnership to show that that partnership was a party to the contract for solicitors services and particularly that it was liable to the solicitors’ firms to pay for those services.

So the question was whether the partnership was liable to pay. It was not.  A and B were the client of one of the firm of solicitors and C was the client of the other firm of solicitors. So (if unpaid) the first firm could have sued Messrs A and B for payment; and the second firm (if unpaid) could have sued  C for payment. But the neither firm could have sued the new partnership for payment.

In practice the partnership may have paid for the supplies because it reimbursed Messrs A, B and C for the solicitors’ fees. But the key point was that it had not been liable to the solicitors’ firms to pay the solicitors’ firms.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Input Tax incurred by Property Consultant related to pre VAT registration supplies

For VAT incurred by a taxable person to be input tax recoverable from HM Revenue and Customs, it must relate to an onward supply by that taxable person in the furtherance of their business.

In the First-tier Tribunal (Tax) case of Lissack v Revenue & Customs [2015] the Appellant, a property consultant, was registered for VAT with effect from 1 March 2011.

The Appellant had been involved in a court case about a business dispute that started in 1996 and the VAT charged to the Appellant on the associated legal fees had been reclaimed as input tax.

The dispute related to the multi-million pound restoration of St Pancras Hotel. The onward supply by the Appellant to the developer, Manhattan Loft Corporation Ltd (“MLCL”), had been that of introductory services in 1996.

HMRC disallowed the input tax claimed in respect of the legal fees as they did not relate to the activities of the Appellant’s VAT registered business.

The Appellant made no further supply of introductory services to MLCL in relation to the project after 1996.

The Tribunal said the supply by the Appellant was made at a time when the VAT registration was not effective and so the VAT charged to him on the legal fees was not recoverable input tax.

Whilst the legal fees were incurred on services supplied to him at a time when the Appellant’s VAT registration was effective, they were incurred in the Appellant’s attempt to enforce an alleged agreement entitling him to further payment for the supply of introductory services in 1996 when there was no VAT registration effective.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.