Category Archives: Latest from the Courts

VAT – Littlewoods compound interest Supreme Court judgement

By   November 6, 2017

Latest from the courts

The Littlewoods Limited case

This is a long running case on whether HMRC is required to pay compound interest (in addition to simple statutory interest) in cases of official error (Please see below for details of how the overpayment initially arose). Such errors are usually in situations where UK law is incompatible with EC legislation.  Previous articles have covered the progress of the case: here and here

Background

Littlewoods was seeking commercial restitution for overpayments of VAT previously made. It’s view was that an appropriate recompense was the payment of compound interest. It was accepted by all parties that statutory interest amounted to only 24% of Littlewoods’ actual time value loss from the relevant overpayments. There are many cases stood behind this case, so it was important for both taxpayers and HMRC.

Decision

The Supreme Court rejected Littlewoods’ claim for compound interest of circa £1.25 billion on VAT repayments of £205 million for the years 1973 to 2004. The court held that the correct reading of the VAT Act is that it excludes common law claims and although references are made to interest otherwise available these are clearly references to interest under other statutory provisions and not the common law. To decide otherwise would render the limitations in the VAT Act otherwise meaningless. Further, it held that the lower courts were wrong to construe the Court of Justice of the European Union’s (CJEU) requirement of an “adequate indemnity” as meaning “complete reimbursement”. The Supreme Court construed the term as “reasonable redress”.

The above reasoning was based on the following reasons:

  • They read the CJEU’s judgment as indicating that the simple interest already received by Littlewoods was adequate even though it was acknowledged to be only about 24% of its actual loss
  • It is the common practice among Member States to award simple interest with the repayment of tax. If the CJEU intended to outlaw that practice they would have said so
  • The reading “reasonable redress” is consistent with the CJEU’s prior and subsequent case law.

Implications

The Supreme Court ruling means that claims for compound interest in cases of official error cannot be pursued through a High Court claim. It would appear that, unless other appeals which are currently listed to be heard are successful, (extremely unlikely given the comments of the Supreme Court) this is the end of the road for compound interest claims.

History of the overpayment
During the period with which this case is concerned, the claimants Littlewoods carried on catalogue sales businesses. It distributed catalogues to customers and sold them goods shown in the catalogues. In order to carry on its businesses, it employed agents, who received a commission in return for their services. They could elect to be paid the commission either in cash or in kind. Commission was paid in cash at the rate of 10% of the sales achieved by the agent. Commission paid in kind took the form of goods supplied by Littlewoods, equal in price to 12.5% of the sales achieved by the agent.
As suppliers of goods, Littlewoods were obliged to account to HMRC for the VAT due in respect of their chargeable supplies. Between 1973 and 2004, they accounted for VAT on the supplies which it made to its agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, that is to say by 2.5%. On a correct understanding of VAT law, the taxable amount of the supplies was actually reduced by the entire 12.5% which constituted the agents’ commission. Consequently, Littlewoods accounted for and paid more VAT to HMRC than was due.

VAT: The ECJ decides that bridge is NOT a sport

By   October 27, 2017

The English Bridge Union Limited (EBU) case

Further to my article on contract (or duplicate) bridge here which covered the Advocate General’s opinion that it could be considered a sport, the Court of Justice of the EU has ruled that it does not qualify as a sport and therefore certain supplies by The EBU are subject to UK VAT.

The court decided that “…the fact that an activity promotes physical and mental health is not, of itself, a sufficient element for it to be concluded that that activity is covered by the concept of ‘sport’ within the meaning of that same provision….

The fact that an activity promoting physical and mental well-being is practised competitively does not lead to a different conclusion. In fact, the Court has ruled that Article 132(1)(m) of Directive 2006/112 does not require, for it to be applicable, that the sporting activity be practised at a particular level, for example, at a professional level, or that the sporting activity at issue be practised in a particular way, namely in a regular or organised manner or in order to participate in sports competitions…

In that respect, it must also be noted that the competitive nature of an activity cannot, per se, be sufficient to establish its classification as a ‘sport’, failing any not negligible physical element.”

As my aged father has always said; it can only be sport if the players wear shorts and sweat…

He may not have been far off you know. I still have difficulty considering pub games as sport, but I am sure there will be many who think that darts and pool are indeed sport.  It is also interesting that, inter alia, HMRC consider; baton twirling, hovering (not “hoovering as I first read it) octopush, dragon boat racing and sombo as sport.

VAT: Distinction between goods and services. Mercedes Benz Financial Services case

By   October 17, 2017

In the CJEU case of Mercedes Benz Financial Services (MBFS) the issue was whether certain supplies where of goods or services.

Technical Background

Before looking at the case, it is worthwhile considering the difference between goods and services and why the distinction is important. For most transactions the difference is clear, although sometimes (such as in this case) it is not immediately apparent. A starting point is that services are “something other than supplying goods”. Difficulties can arise in areas such as; provision of; information, software and, as MBFS discovered, Hire Purchase (HP)/leasing.

The distinction is important for two main reasons:

  • VAT liability – Goods and services may have different VAT rates applicable
  • Tax point – goods and services have different tax point rules, see here

The difference between HP and Leasing arrangements:

In an HP agreement the intention is usually for the ownership of the goods to pass when the final payment has been made. The transaction therefore relates to a supply of goods. If title to goods does not pass, this is leasing and represents a supply of services.

Case Background

MBFS offered certain contract purchases which were similar to many personal contract purchase deals for vehicles. These featured regular monthly payments with a final balloon payment. In the MBFS arrangements in question a significant difference to “usual” personal contract purchase agreements was that the balloon payment represented over 40% of the price of the car and payment of this fee was entirely optional.

The EU rules set out that there is a supply of goods where “in the normal course of events” ownership will pass at the latest upon payment of the final instalment. Consequently, the focus here was on whether the optional final payment meant that in the normal course of events the ownership of the car would pass to the customer.

Decision

The CJEU decided that the supplies were those of services rather than goods. This was based on the fact that, although the ownership transfer clause is an indicator of the transaction representing a supply of goods, there was a  genuine economic alternative to the option being exercised. The circa 40% of the car price was a significant amount and it did not immediately follow that all customers would make this final payment. It was observed that in a “traditional” HP arrangement making the final payment was the “only economically rational choice”.  This meant that the supply was one of services.

VAT Impact

As this was ruled to be a supply of services, output tax was not due from MBFS at the start of the contract (as would have been the case if the supply had been one of goods). This results in a significant cashflow saving.

Commentary

Any business which provides vehicles via HP or leasing arrangements should review its supplies and contracts to determine whether it can take advantage of this CJEU ruling. We are able to assist in this process.

VAT HMRC Updates

By   October 12, 2017

HMRC has updated some of its guidance.  This includes: VAT manuals (HMRC internal guidance), VAT Notices and VAT Information Sheets and Revenue and Customs Briefs.

Full details here And a brief summary below:

VAT manuals

VAT Land and Property/Construction

VATLP24750 – Supplies between landlords and tenants; provision of finance for the purposes of the option to tax anti-avoidance legislation

VATLP23500 – Guidance on the option to tax anti-avoidance legislation

VCONST15250 and VCONST15610 – Guidance on the differences between care homes and a hospitals

VAT Education

VATEDU53400 – Guidance on “closely related goods” in relation to education services following the case of Brockenhurst College (please see here)

New and revised VAT Notices

702: imports

701/49: finance

700/45: how to correct VAT errors and make adjustments or claims

700/58: treatment of VAT repayment returns and supplements

702/7: import VAT relief for goods supplied onward to another country in the EC

714: zero rating young children’s clothing and footwear

New VAT Information Sheets and Revenue and Customs Briefs

VAT Information Sheets

Revenue and Customs Briefs

Please contact us if any of the above affects you , or you have any queries.

VAT: Extent of zero rating for a construction by a charity

By   October 9, 2017

Latest from the courts

In the First Tier Tribunal (FTT) case of The Trustees of Litton & Thorner Community Hall the issue was whether certain construction works were a completion of an initial build or whether they were an extension or an annex to a pre-existing building. And if an annex, whether it was capable of functioning independently from the existing building and whether there is a main access to the annex.

Background

The appellant began construction of a hall in 2008. It was intended that the hall would be available for a school to use and also for it to be available at for village use and other activities, such as by local youth clubs and a scout group. There was no dispute that the original construction was zero rated via VAT Act 1994, Schedule 8, Group 5, item 2  (The supply in the course of the construction of a building designed for a relevant charitable purpose).

A decision was made to install ground source heat pumps to feed the heating system. However the space occupied to accommodate the system meant that there was insufficient storage space in the hall. So at the time of construction, but before planning permission was obtained, it was decided with the builder that a steel joist should be incorporated within the east wall of the hall in order to facilitate the necessary support and access when the envisaged storage facility was added.  The additional planning permission was granted in November 2011, three years after building work commenced. The facility was eventually able to be used when work was completed in 2014. The delay was caused (not surprisingly) by funding issues. It was the VAT treatment of work relating to the addition of the storage area which was the subject of the appeal, with HMRC considering that it was either standard rated work to the building or was a standard rated extension to it.

Technical background

The provisions relevant to the appeal are VAT Act 1994, Schedule 8, Group 5, Notes 16 and 17. It is worthwhile taking a moment to consider these in their entirety:

Note 16

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

(a ) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c) subject to Note (17) below, the construction of an annexe to an existing building.

Note 17

Note 16(c) above shall not apply where the whole or a part of an annexe is intended for use solely for a relevant charitable purpose and;

(a) the annexe is capable of functioning independently from the existing building; and

(b) the only access or where there is more than one means of access, the main access to:

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe.

The Appeal

The Trustees appealed on two separate and distinct bases:

(1) That the additional building was the completion of the original building and neither an extension nor an annex to it. It was their case that the temporal disconnect between the two building processes must be seen in the factual context, with particular reference to the decision to put in a lintel to allow the building to be completed when additional monies and planning permission were available. Additionally, alongside this fact was that the appellant was a non-commercial organisation and so things could not progress as expeditiously as they might have done if those things were being undertaken by a commercial organisation.

(2) The second basis is that, in any event, the additional building is zero rated by reference to paragraphs 16(c) and 17 of Group 5 to Schedule 8. It was the appellant’s case that the additional building is an annex intended for use solely for relevant charitable purposes and it meets the conditions set out in paragraph 17(a) & (b).

Decision

The FTT decided that the work was subject to zero rating. Not only was it part of the original construction (albeit that there was a significant time period between the building original work and the work on the storage area) but also, even if the storage area is considered as being separate, it was ruled that, on the facts, it was an annex rather than an extension, so it also qualified for zero rating on this basis.

Commentary

The date a building is “completed” is often an issue which creates significant disputes with HMRC, not only for charities, but for “regular” housebuilders. I have also encountered the distinction between an annex and an extension representing a very real topic, especially with academy schools. Even small changes in circumstances can create differing VAT outcomes. My advice is to seek assistance form a VAT consultant at the earliest stage possible. It may be that with a slight amendment to plans, zero rating may be obtained in order to avoid an extra 20% on building costs which charities, more often than not, are unable to reclaim.

Links to what we can offer to schools here, and charities here

Additionally, our offering to the construction industry here

VAT: Separate or composite supply? The Ice Rink Company Ltd case

By   October 4, 2017

Latest from the courts – Appellant on thin ice?

In the first Tier Tribunal case of The Ice Rink Company Ltd the issue was whether supplies of admission to ice skating rink and the hire of children’s ice skates – where sold as a package were single or multiple supplies. This is yet another separate/composite/compound supply case.

As a background to the issue please see previous relevant cases here here and here (in fact, this case was referred to in this hearing).

The issue of what is a single supply and what must be split as separate supplies seems to be neverending and HMRC appears to have an appetite to challenge every moot position through the courts.

Background

As anyone who has been ice skating will be aware (I tend to avoid the places not least as a result of not wishing to demonstrate my total lack of balance or skill) you can take your own skates, or hire skates for that session. In this case, the costs were £8 to use the rink or £10 with skate hire. The sole issue in the appeal was whether, when the appellants sold a “package deal” at £10 allowing a child to skate and to hire skates, it made a single supply or two separate supplies. If they made separate supplies, the £2 hire of skates to children is zero-rated. If it is a single supply the whole package is standard rated.

Decision

The judge decided that there were two separate supplies and that the skate hire supply could be treated as zero rated. This decision was based on a number of factors put forward by the appellant and which may be summarised as:

  • Skating with skate hire is a mixed supply, as the supply of skates is distinct and separate from the supply of admission
  • Around half the customers wishing to skate brought their own skates and some customers hired skates without paying to skate (at club sessions when a club had hired the rink and they needed skates for their club members). The hire of skates was therefore capable of being carved out from a single supply
  • A single “package” price is not determinative – in this case is it clear to the customer that they have freedom of choice and the components are available separately
  • Despite what HMRC said, it is clear that the skate hire is additional and optional
  • Neither supply is predominant and neither ancillary (as HMRC have previously accepted)
  • There was physical separation between the admission booth and the skate hire zone

The decision helpful included the following observations: “In our view… it is plain that in this case there are two supplies, a supply of the use of a skating rink and the supply of hire of ice skates. Neither is ancillary to the other as they both can be, and are, purchased on their own. Far from it being artificial to split the package into two, that is precisely what is in effect done in a substantial percentage of the appellant’s transactions with those using its facilities.” And “From the customers’ viewpoint a consumer of the package is getting the two things they want. The two elements are dissociable, not because of any spatial separation between the ticket office and the skate hire booth, but because that is the only appropriate way of looking at the supply of the elements.” And “…a substantial percentage of customers will choose to buy one or other of the element but not both, and that it is possible that the same customer may at one time buy a package and at another buy only one of the elements. Therefore it makes no sense to say that the elements are not dissociable when on a majority of the occasions that users enter the reception to use the rinks they choose only one of the two main elements, entry to the rink.”

 Commentary

A sensible decision based on the facts. There does not seem to be an end to these types of cases as the decision is always based on the unique facts of each situation. It is difficult, if not impossible, to draft legislation which covers every type of scenario. Consequently, case law is very important in this area and the lead cases of CPP and Levob are the most cited. This case further illustrates that HMRC are not always correct in reaching a conclusion on multiple/composite supply cases and there is usually value in challenging their determinations. I would also say, from experience, that a review of a business’ activities can often identify such contentious areas and as always, getting it wrong can either result in an assessment and penalties, or mean that a business is paying too much VAT – not something that sits easily with me!

VAT: Latest from the courts – partial exemption attribution

By   October 4, 2017

In court about courts…

In the First Tier tribunal (FTT) case of The Queen’s Club Limited the issue was whether certain input tax was attributable to the company’s taxable activities or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. A brief guide to partial exemption here 

Background

The Queen’s Club (The Club) is a well-known members’ tennis club in West London. The Club’s tennis facilities are world-class and each year the Lawn Tennis Association hires the Club’s courts to put on the Aegon Championship which is a precursor to the Wimbledon tournament and attracts many of the world’s leading players. It makes exempt supplies of sporting services to its members and also makes taxable supplies of food and drink in its bars and restaurants. It incurred VAT on the costs of refurbishing the bars, restaurant and café facilities on its premises. The Club considers that it is entitled to a full credit for input tax on those expenses as they were wholly attributable to the taxable supply of catering.

The Club’s revenue comes primarily from the membership fees that it charges. For the year 2012-13 the annual membership fee was £1820. By becoming a member of the Club, a person obtains the right to use both its sporting and non-sporting (catering) facilities. It was decided by the FTT that the Club had a discretion, but not an obligation, to provide the café etc to its members, however it was accepted that most members do not use the social facilities.  It was agreed that the membership fee was consideration for an exempt supply of services closely linked with sport for the purposes of Value Added Tax Act 1994, Schedule 9, item 10. The Club also receives five main sources of taxable income:

  • Fees from the LTA to use its courts for the Aegon Championship
  • Sales of food and drink from restaurant and bars
  • Sales of sporting and other goods
  • Provision of the use of the restaurant and bars, usually with catering
  • Rental income for certain other rooms

The decision

There was no dispute that there was a direct and immediate link between the refurbishment of the restaurant and bars and taxable supplies made from them. The question that divided the parties was whether there was also a direct and immediate link between the refurbishment the exempt membership supplies.

The judge decided that “In short, viewed objectively, what members obtain when they join the Club is a right of access to world-class sporting facilities together with such additional facilities as the Club decides, in its discretion, to offer. The focus is on the sporting facilities…” and that, viewed objectively, the renovated bars and restaurant are a means by which members are able enjoy the Club’s sporting offering. The overall conclusion was that there was no direct and immediate link between the renovation goods and services and exempt supplies that the Club made.

The decision was that the Club was entitled to credit for the full amount of input tax that it incurred.

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant; particularly when they are incurred on land and property. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution. These type of costs are often covered by the Capital Goods Scheme, so care must be taken over a ten year period which adds to the complexity.  As always, when considering land and property transactions it pays to obtain professional advice as mistakes are costly. A brief guide to land and property issues here

VAT due on property search fees? Whether they are disbursements

By   September 25, 2017

Latest from the courts – Brabners LLP

In the First Tier Tribunal case of Brabners LLP (Brabners) the issue was whether an external search agency used by the appellant correctly treated its supplies as VAT free, and if this was the case, whether the VAT free treatment continued to the appellant’s clients by way of a disbursement.

This is an interesting case and may create historic difficulties for conveyancing solicitors.

Background

Brabners is a law firm with a real estate department. It offers conveyancing services, both to buyers and sellers, in relation to proposed property transactions, for both commercial and residential property. In order to fulfil certain legal requirements, it used an external third party entity to obtain online property searches. The Appellant stated that it uses the online system for the majority of its searches (as opposed to a postal search carried out by employees of a Local authority, or a personal search at the Local Authority’s premises). The online search is not carried out by the Appellant, but rather, a specialist online search agency (‘Searchflow’) engaged by Brabners. Searchflow obtained the required property searches from the Local Authority’s digitised or dematerialised files and registers, and passed those results back to Brabners.

Searchflow invoiced the appellant for the cost of obtaining access to documents without the addition of VAT. Brabners treated this as a disbursement and invoiced its clients for the same amount without VAT.

The issues were:

  • Should the supply by the search agency be subject to output tax?
  • Was there a Single or multiple supply?
  • Whether the charge to the end user of the services should be treated as a disbursement in respect of the search element
  • Which party consumed Searchflow’s services? (Brabners, or Brabners’ clients)

Note: the disbursement position is only (practically) relevant in this case if it was decided that the search fee was VAT free. Local Authorities now (from March 2017) charge VAT for searches, so the impact is only likely to impact on past situations.

Contentions 

The main thrust of the Brabners’ argument is that the firm was requested, or expressly authorised, to obtain a search on the client’s behalf. Consequently, this meant that the firm was simply acting as the client’s agent, and the report belongs to the client. Brabners, argued that the search fees qualified as a disbursement for the purposes of VAT, and were not part of the otherwise taxable supply. It also argued that this separate treatment is intelligible and sensible. HMRC formed the view that the relevant payments cannot be treated as a disbursement as all the tests to do so were not met.  For a guide to disbursements and the relevant tests please see here

Decision

The judge decided that the relevant expenses paid to Searchflow had been incurred by the appellant “in the course of making its own supply of services to” (its client) “and as part of the whole of the services rendered by it to” (its client). Therefore Brabners had consumed the service such that it could not be a disbursement. This point in this case proves academic as it was also, unsurprisingly, decided that Searchflow’s services were standard rated, so even if it were a disbursement, the VAT would still be payable by the appellant’s client.

 Consequences

All firms which carry out conveyancing should review the VAT treatment of searches. If they have erroneously treated similar transactions as disbursements in the past, this is likely to require correction. Clearly, HMRC will be alive to this decision and it is anticipated that legal firms will be the subject of close inspection.

This case may also mean that third party search entities may be issuing retrospective VAT invoices or work which was previously treated as VAT free. This needs to be recognised and arrangements in place to recover any input tax incurred.

We are able to assist conveyancing firms with a review of the VAT position in light of this case.

VAT: Output tax on credits? A Tax point case

By   September 18, 2017

Latest from the courts

In the Scottish Court of Session case of Findmypast Limited the issue was whether the sale of credits represented a taxable supply, the tax point of which was when payment was received.

Background

Findmypast carries on a business of providing access to genealogical and ancestry websites which it owns or for which it holds a licence. If a customer wishes to view or download most of the records on the website, they will be required to make a payment. This may be done by taking out a subscription for a fixed period, which confers unlimited use of the records during that period. Alternatively, the customer may use a system known as Pay As You Go. This involves the payment of a lump sum in return for which the customer receives a number of “credits”. The credits may be used to view records on the website, and each time a record is viewed some of the credits are used up. The credits are only valid for a fixed period, but unused credits may be revived if the customer purchases further credits within two years; otherwise they are irrevocably lost.

Technical

Findmypast accounted for output tax on the price of the credits at the time when they were sold.  As a consequence, VAT was paid, not only on credits which were used, but also on credits that were not redeemed (The tax point therefore similar to the current rules on the sale of single use face value vouchers. Rules here).

The taxpayer claimed repayment of the VAT accounted for on the sale of unredeemed vouchers during a period which ran up to May 2012 when the legislation was changed.

The question was whether output tax should have been accounted for at the time when the vouchers were sold or at the time the vouchers were redeemed. If the tax point was the date of redemption, then the claim would be valid. The court identified the following issues:

  • What is the nature of the supply made by the taxpayer to customers?
    • Was it was the supply of genealogical records selected by the customer and viewed or downloaded by them?
    • Or was the supply a package of rights and services, which conferred a right to search the records and download and print items from the taxpayer’s websites?

If the former is accurate, the supply only takes place if and when a particular record is viewed or downloaded.  If the latter, the supply includes a general right to search which is exercisable as soon as the credits are purchased, with the result that the supply takes place at that point.

A subtle distinction, but one which has an obviously big VAT impact.

Decision

The Court decided that where credits were not redeemed, the taxpayer is entitled to be repaid the output tax previously declared as no tax point was created. In the Court’s view, Findmypast was making the relevant documents available in return for payments received. HMRC’s contention that there was a complex, multiple supply of the facility to find and access genealogical documents such that payment created a tax point was dismissed. The court further found that the relevant payments did not qualify as prepayments (deposits) because it was not known at the time of purchase whether the credits would be redeemed (many were not) or indeed at what time they would be redeemed if they were.  It was also decided that the credits were not Face Value Vouchers per VAT Act 1994, Schedule 10A, paragraph 1(1) as they are rather mere credits that permit the customer to view and download particular documents on the taxpayer’s website, through the operation of the taxpayer’s accounting system.  And that they are not purchased for their own sake but as a means to view or download documents.

Commentary

Readers of my past articles will have identified that multiple/single supplies and tax points create have been hot topics recently, and this is the latest chapter in the story.

This case highlights that any payments received by a business must be analysed closely and the actual nature of them determined according to the legislation and case law. Not all payments received create a tax point and

Some will not represent consideration such that output tax is due. Careful consideration of the tax point rules is necessary.  Not only can the correct application of the rules aid cashflow, but in certain circumstances (such as set out in this case) it is possible to avoid paying VAT on receipts at all.

VAT: Latest from the courts –zero rating of sub-contractors’ supplies

By   August 8, 2017

In the First Tier Tribunal case of Summit Electrical Installations Ltd the issue was whether supplies in respect of student accommodation made by an electrical sub-contractor were eligible for zero rating as supplies in the course of construction of buildings designed as a series of dwellings. Alternatively, were they, as HMRC contended; standard rated supplies in the course of construction of a building used for a Relevant Residential Purpose (RRP)?

Background

The appellant was appointed as the electrical subcontractor working to a main contractor on a development known as Primus Place in Leicester. This development is a seven storey block of student accommodation comprising 140 studio flats and associated facilities. Floors one to six are similar in layout with the majority of the studio flats being the same size. There are also a number of larger studios on some floors. On the ground floor there is a communal reception, cycle store, and laundry. In addition management offices, stores, bins and plant rooms are situated on the ground floor. Each of the studio flats was fitted out with a bathroom pod (a unit including shower, sink and toilet) installed in the corner of the room. In addition there was a small kitchenette with dish washing sink, countertop, cooker, fridge and microwave. Through a doorless stud wall is an open plan sleeping area and walk in cupboard.

The planning permission was granted subject to one relevant condition which provided that at the development: “…no person other than a full time student attending the University of Leicester or DeMontfort University…shall occupy these flats at any time”.

The main contractor provided a zero rating certificate to the appellant. This certificate certified that the developer of the site intended to use the buildings for a relevant residential purpose, namely student living accommodation.

Technical

In this case the distinction between the construction of dwellings and RRPs is that sub-contractors may zero rate their supplies if the work is in respect of dwellings, but those same supplies are standard rated if what is being constructed is a RRP. It is useful to consider the distinction here.

Relevant Residential Purpose

RRP means use as:

(a) a home or other institution providing residential accommodation for children

(b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder

(c) a hospice

(d) residential accommodation for students or school pupils

(e) residential accommodation for members of any of the armed forces

(f) a monastery, nunnery or similar establishment, or

(g) an institution which is the sole or main residence of at least 90 per cent. of its residents

but not use as a:

hospital or similar institution

prison or similar institution, or

hotel, inn or similar establishment

Clearly, by the above definition, student accommodation is deemed to be a RRP. Therefore, the Tribunal was asked to consider whether the accommodation would also qualify as dwellings, and if so, whether “designed as a dwelling” takes precedence. The definition of a dwelling is as follows (“Note 2” as referred to below).

Dwellings

A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied:

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Decision

The judge ruled that the accommodation qualified as dwellings for the purpose of zero rating such that the sub-contractors supplies could also be zero rated. This was the case even though the planning permission contained a condition restricting their use to students of the universities only. The building also qualified as a RRP but via VAT Act 1994, Schedule 8, Group 5, note 2 – designed as a dwelling takes precedence over RRP.

NB: The Tribunal also found that HMRC guidance which sets out that in similar circumstances it is the main contractor who determines which type of zero rating applies to a particular development has no basis in law. It is the responsibility of the sub-contractor to determine whether it is working on a dwelling or a RRP building regardless of the main contractor’s position.

Commentary

HMRC appeared to have relied solely on para (c) of Note 2 (above) to disqualify the accommodation from being dwellings, on the basis that the planning permission prohibited occupation by any other person than students of the universities, but the judge was having none of that. The decision was hardly unexpected, but the comments on there being no legal basis to support HMRC’s published guidance is helpful and provides clarity.

As always, when analysing supplies of construction services (plus associated goods) and transactions involving land and property it pays to get proper VAT advice. There are many traps for the unwary and the values involved are usually high.  The cost of getting it wrong can be very harmful to a business.