Tag Archives: anti-avoidance

VAT Latest from the courts – Application of Capital Goods Scheme

By   10 November 2016

Should the costs of a phased development be aggregated, and if so, do the anti-avoidance provisions apply?

In the case of Water Property Limited (WPL) the First Tier Tribunal was asked to consider the application of; the Capital Goods Scheme (CGS) and the anti-avoidance provisions set out in the VAT Act 1994, Schedule 10, para 12.

A helpful guide to the CGS is here

Background

WPL purchased land and buildings formerly used as a public house, subject to planning permission to convert the ground floor into a children’s day care nursery and the upper floor into residential flats. The planning permission was subsequently granted. WPL paid £210,000 plus £37,500 VAT on the acquisition of the ex-pub in March 2013. The children’s nursery business was kept separate from the property development business to enable the children’s nursery business to be sold at a date in the future and for the leasehold reversion to be retained as an investment by WPL.  The value of the building contract for the nursery was £209,812.34 including VAT. The value of the contract for the residential flats was £161,546.42 including VAT. The consideration for the acquisition and each phase of development was below £250,000 (the threshold at which land and buildings become CGS items) but combined, they exceeded the £250,000 limit. WPL exercised an option to tax on the property and entered into a lease with Smile Childcare Limited (SCL).  SCL was established to carry on a business of the provision of nursery care for infant children. It was jointly owned by Mr and Mrs Waters. Mrs Waters as the operator of the children’s nursery.

WPL recovered input tax on costs incurred in respect of the nursery, but not the flats. It was accepted by the appellant that SCL and WPL were “connected” within the meaning of VAT Act 1994, Schedule 10, para 13 and that the activity of carrying on the business of a nursery was an exempt activity.

Issue

HMRC formed the view that the option to tax should be disapplied by virtue of the anti-avoidance legislation meaning that no input tax was recoverable. This is because the property was, or was intended to become, a CGS item and the ‘exempt land test’ is met. This test is met if, at the time the grant is made, the grantor, or a person connected with the grantor expects the land to be used for an exempt purpose.

So the issue was whether the land constituted a CGS item.  That is, whether the value of the two elements forming the phased development should be aggregated.

Decision

The FTT allowed the taxpayer’s appeal against HMRC’s decision. It was decided that the acquisition and development costs were financed through different means; there were separate contracts for each phase; there was no overlap in the works* and HMRC had not identified any evasion, avoidance or abuse and considered that the costs did not need to be aggregated.  In addition, it was concluded that WPL had relied on HMRC guidance in determining that there was no requirement to aggregate the cost of the phased development provided that there was no overlap in time.

As a consequence, as each part of the development fell below the £250,000 limit, there were no CGS items.  Therefore the fact that the parties were connected was irrelevant and the anti-avoidance provisions did not apply such that the option to tax could not be disapplied meaning that the recovery of the input tax was appropriate. The Chairman also commented that the appellant had a legitimate expectation to rely on the guidance provided by HMRC (in this case the provision of a copy of Public Notice 706/2).

Commentary

There is often uncertainty on the VAT position of land and property developments of this kind, and the interaction with the CGS is rarely straightforward.  This is not helped by HMRC’s interpretation of the rules.

Action

If any business or advisers with clients which have been;

  •  forced to use the CGS as a result of aggregation
  • subject to the application of the anti-avoidance provisions
  • assessed despite relying on HMRC’s published guidance

they should seek advice and review their position. We can advise in such circumstances.

 * As per PN 706/2 Para 4.12 as follows
 “What if the refurbishment is in phases?
If you do this you will need to decide whether the work should be treated as a whole for CGS [capital goods scheme] purposes or whether there is more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes. Normally there is more than one refurbishment when:
· There are separate contracts for each phase of work, or;
· A contract where each phase is a separate option which can be selected, and;
· Each phase of work is completed before work on the next phase starts…”

VAT – Land and Property Issues

By   23 May 2014

Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a supplier is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. These often result in large penalties and interest payments plus unwanted attentions from the VAT man. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include; whether a property sale can qualify as a VAT free Transfer Of a Going Concern, supplies involving Listed property and conversions of properties from commercial to residential use, whether to opt to a commercial property, the recovery of VAT charged on a property purchase, supplies between landlord and tenants, the Capital Goods Scheme, HMRC anti-avoidance rules and even seemingly straightforward VAT registration. Additionally, the VAT treatment of building services throws up its own set of VAT complications.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with me can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors.

For more information, please see our Land & Property services