Constable VAT Land and Property Focus 17 January 2023

This newsletter is intended for readers with an interest in the land and property sector and provides a summary of recent updates and significant judgements from the tribunals and courts which may be relevant to you or your business.


Revenue and Customs Brief 1(2023): Changes in processing option to tax forms
HMRC has recently released the above brief to confirm that from 1 February 2023, HMRC will stop issuing option to tax notification receipt letters. An automated response will be sent confirming the date when the notification was received. This should be kept by taxpayers for their records for at least 6 years.

HMRC will also no longer confirm the existence of an option to tax as it is the taxpayer’s responsibility to keep such information as part of business records. However, HMRC will respond if a request is made under the following conditions:

  • The effective opted date is likely to be over 6 years ago
  • If you have been appointed as a Land and Property Act receiver, or an insolvency practitioner to administer the property in question

Buildings and construction (VAT Notice 708)
HMRC has updated the section of Notice 708 that explains when a building falls into the category of village halls and similar buildings and may benefit from the zero-rate relief available for such buildings.

A building falls within the ‘village halls or similar’ buildings when all of the following apply:

  • Constructed and managed by a charity
  • Operated on a non-commercial basis for the benefit of a local community as a village hall or similar
  • Used solely to provide social or recreational facilities for a local community

This is a common point of dispute as HMRC interprets the provision increasingly strictly and the issue has been heard before the Tribunal, particularly in cases relating to charitable sports clubs.

HMRC has also updated the overview section and section 2 to include information about the VAT domestic reverse charge. The certificate in section 18.1 for certain scenarios regarding zero and reduced rating has also been updated to confirm it will be necessary to include the name and address of the organisation receiving the building work.

VAT domestic reverse charge technical guide
The above guidance provides technical information about the VAT reverse charge that may apply if you buy or sell building and construction services. HMRC has recently added a new section on scaffolding to confirm that there will be a transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules and also updated the content with guidance on the following:

  • Reverse charge exemption for end users and intermediary suppliers
  • How to tell the difference between ‘labour-only’ supplies of construction services and supplies of workers by employment businesses
  • Accounting for VAT where you supply or receive construction services together with other goods or services
  • Accounting for VAT on the hire, erection and dismantling of scaffolding
  • How the reverse charge affects supplies made by and to utility companies and how non-established taxable persons should account for VAT on construction services.


Since the end of the transitional period on 31 December 2020 European court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. We will therefore continue to include summaries of any European judgements that we consider to be relevant. If you are concerned about the impact of any matters raised in the following cases, please contact us.


1. Can a sale and leaseback contract be treated as an invoice?

This case concerns a transaction arising between Raiffeisen Leasing (RL) and RED.d.o.o (RED).  RED owned some land in Slovenia with the intention of developing it. To finance the development, it entered into a sale and leaseback contract with RL. RED charged RL VAT on the sale of the land and RL recovered this VAT.  VAT on the supplies from RL to RED was included in the contractual sale and leaseback agreement between RL and RED but RL did not raise a separate VAT invoice, nor did it declare and pay the VAT sum mentioned in the contract on its VAT return.

RED recovered the VAT stated in the contractual sale and leaseback agreement, contending that the agreement constituted an invoice in respect of supplies received from RL. The local tax authorities disagreed and refused the input VAT deduction.  The question referred to the CJEU was whether a contractual sale and leaseback agreement which was not followed by a VAT invoice, may be regarded as an invoice, and if so, what details that contractual agreement must contain.

The CJEU ruled that the leaseback agreement was capable of being treated as a VAT invoice even in the absence of any taxable transaction, provided that it contained sufficient information for RED to substantiate its right to recover input tax. The fact that some of the details normally required on an invoice (such as the applicable VAT rate) were implied rather than expressly stated did not prevent the leaseback agreement from being treated as an invoice. The fact that RL never intended the leaseback to be treated as an invoice was irrelevant. As RL had effectively issued a VAT invoice in 2007 (when the contract was agreed) it should have accounted for output tax at that time.

The CJEU concluded that the local tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions set out under the VAT Directive, if they have all the information to ascertain that the substantive conditions for input VAT recovery are met.

Constable Comment: The CJEU concluded that where the conditions of input VAT recovery are implied or expressly stated in a contractual agreement, the document may be regarded as an invoice. This effectively means output VAT is payable by a supplier and the customer has the right to deduct that input VAT.

2. Input tax recovery on the compulsory purchase of property

This case concerns the denial of the right to deduct VAT incurred on the purchase of a property on account of an alleged abuse of rights by HA.EN (H). In 2015 HA.EN purchased a secured loan which had been granted by a bank to a Lithuanian property developer. The developer was facing financial difficulties and was forced to sell the property to H for EUR 4.5million plus VAT (EUR 949,000) as a result of a compulsory purchase order. The sale proceeds reduced the outstanding loan but no cash changed hands.

As a result of the financial difficulties faced by the developer, whilst it accounted for output VAT on its VAT return, it could not pay the output VAT due and it was declared insolvent.

H reclaimed the VAT incurred on the purchase of the property. Following a tax inspection, the local tax authority held that H knew or should have known that the developer would not pay the output VAT due. This being so the tax authority considered H had acted in bad faith and committed an abuse of rights and the tax authority denied H the right to deduct the VAT incurred as input tax.

Two conditions must be met in order to find that an abusive practice exists. First, the transactions concerned must result in the obtaining of a tax advantage contrary to the intentions of the law. Second, the essential aim of the transactions is solely to obtain that tax advantage. The CJEU stated that even if the input VAT recovery by H is seen as a tax advantage, that advantage cannot be regarded as contrary to the intentions of the law.

Under the second condition, the CJEU confirmed that H was a creditor of the developer as it held a mortgage over the property which was subject to a compulsory sale. The essential aim of the compulsory sale was for H to recover its debt, rather than securing VAT advantages. The CJEU concluded that H should therefore not be denied input VAT recovery.

Constable Comment: This case highlighted that for the conditions for ‘abuse of rights’ to apply it must be proved that the tax advantage must be contrary to the intentions of the law and the essential aim of the transaction is solely to obtain that advantage. Whilst EU rules are no longer binding on UK businesses, these conditions may be taken into consideration by UK courts.

Upper Tier Tribunal

3. Car parking at hospital subject to VAT

This case concerns Northumbria Healthcare NHS Foundation Trust (the Trust) and whether VAT was chargeable on the supply of car parking made by the Trust at hospital and healthcare sites. The issue in this appeal was whether the Trust was a taxable person when making supplies of car parking (the FTT concluded it was) or whether it was acting as a public authority and such supplies were made pursuant to a “special legal regime”. Under the latter treatment, the Trust did not have to account for VAT on its supplies.

The UT was asked to consider, first, whether the Trust’s supplies of car parking are made pursuant to a “special legal regime” applicable to the Trust, and secondly, if so, whether treating the Trust as a non-taxable person would lead to a significant distortion of competition.

The UT considered the FTT did not err in law concluding that the Trust did not provide car parking under a “special legal regime”. The UT confirmed that the mere fact that the public authority is required to act in accordance with statutory powers is not sufficient, rather it is necessary to show that the pursuit of the specific activities in question involves or is closely linked to the exercise of rights and powers of the public authority, in order to fall within the special legal regime.

With regards to distortion of competition, the Trust argued that opportunities for competition was limited, and where it did arise, the Trust was required by guidance to take steps to avoid competition. The UT disagreed and concluded that there was competition with private car park operators, and the Trust not charging VAT would lead to a distortion of competition. Accordingly, the UT dismissed the appeal.

Constable Comment: This detailed analysis by the Tribunal, particularly in relation to the interaction between public law obligations and the special legal regime test, will be of interest to those involved in local authority VAT matters. The Tribunal’s comments on what constitutes unfair competition will be applicable across many wider aspects of VAT.

First Tier Tribunal

4. Input VAT recovery on leases

Ashton Legal (AL) is a firm of solicitors and a trading partnership. AL found suitable premises for its operations and sought to lease those premises.  However, under the Law of Property Act 1925, a partnership can enter into a lease in the name of no more than four partners, therefore it was decided that Ashton Legal Limited (the Company) would be established to enter into the lease.  AL reclaimed VAT charged by the landlord on invoices addressed to the Company as input VAT and HMRC took the view that it should not as the Company was the recipient of the supply.

The landlord had made it clear that if it were to contract with a shell company with no assets then it required a guarantee from AL. The landlord knew that AL would be the sole occupant of the premises and would meet all obligations of the Company in terms of the lease, specifically paying the rent.

The rent invoices raised by the Landlord were addressed to the Company but sent to AL. AL processed and paid those invoices and reclaimed the VAT incurred through its VAT returns as input VAT.

HMRC argued that the contracting parties were the Company and the landlord.  The landlord therefore made its supplies to the Company, not AL. As the Company was not VAT registered and had not opted to tax the property, HMRC argued that the Company in effect made an onward supply to AL that was VAT exempt.  AL had no right to recover any VAT incurred by the company and the Company also had no right to input VAT recovery.

AL argued that the recipient of the supply should be identified by reference to the commercial and economic reality of the arrangements, considering all circumstances, and that the economic reality was that AL received the supplies.

The Tribunal first stated that payment is not decisive, so the mere fact that AL pays the rent does not mean that the supply, for VAT purposes, was made to AL. However, the Tribunal noted that AL was liable to pay rent to the landlord as everyone knew that a dormant company with £1 share capital and no assets or trade, was in no position to pay rent. If AL wished to lease the premise, it had to pay rent in order to secure the premises from which it made taxable supplies. This was the economic and commercial reality of the arrangement; the company was merely inserted to deal with the 1925 Act.

It was concluded that AL used, enjoyed, and benefitted from the rental of the premises and has vested interest in the supply of those premises for which it was paying. As a result, the Tribunal concluded that the VAT charged on the rent was input VAT of AL and was recoverable.

Constable Comment: In our view this case should not have been taken by HMRC.  There had been a previous case before the Tribunal on almost identical facts that HMRC lost.  That previous case was only binding on the parties involved and a common approach by HMRC is not to appeal FTT cases that it loses so that it can seemingly ignore those decisions and continue applying policy the FTT has found to be wrong.  This practice may be legal but seems very unfair as it leaves taxpayers either continually refighting the same battle or obliged to accept HMRC decisions they perceive to be wrong because of the cost implications of an appeal.  If HMRC genuinely believes a FTT decision is wrong then in our view the correct approach should be to appeal that decision, not ignore it for fear of setting a binding precedent. 

5. Input VAT recovery: Lease rental invoices

This case concerned a VAT assessment in the sum of £26,250 raised by HMRC. The appellant, Star Services Oxford Ltd (SSO) operates a bed and breakfast business from a premises which is leased from Oxford City Council (OCC). However, prior to SSO being incorporated, Mr Latifi (owner of SSO) took out the lease with OCC in his personal capacity. Mr Latifi sublet parts of the building to Lola Zeng and Stitch, and the rest of the building was used for the bed and breakfast business by SSO.

The VAT assessment relates to input VAT claims made by SSO regarding VAT incurred on the lease for the building from OCC. HMRC identified an issue in that the lease from OCC is made to Mr Latifi as an individual rather than by SSO as the company, which is the VAT registered entity. HMRC noted that SSO has been reclaiming input VAT on invoices which are addressed to Mr Latifi.

HMRC raised the VAT assessment on the grounds that SSO does not hold valid VAT invoices which entitles it to deduct input VAT. OCC leases the premises to Mr Latifi who then sublets to SSO, Zola Zeng and Stitch, and therefore, the VAT charged was incurred by Mr Latifi not SSO.

The appellant argued that the lease was acquired in Mr Latifi’s name because SSO did not exist at the time the lease was entered into. The name on the lease was changed after HMRC notified this error. It was submitted that this was an innocent omission to transfer the lease from Mr Latifi’s name to SSO, and the delay was caused by forgetfulness. The appellant claims that HMRC is exploiting an administrative mistake and if Mr Latifi knew the consequences the lease would have been changed earlier.

The Tribunal considered whether the requirements for claiming input VAT has been met. It confirmed as a starting point that in order to reclaim input VAT the appellant must hold a valid VAT invoice to evidence that the supply is being received by the appellant. This means that the invoice needs to be addressed to the right legal entity and the supply needs to be made to that entity. VAT cannot be recovered on invoices in the name of the third parties.

The Tribunal concluded that the legal relationship was between OCC and Mr Latifi due to the lease agreement being in the name of Mr Latifi. As a result, SSO is not entitled to reclaim any input VAT incurred and the appeal was dismissed.

Constable Comment: This case shows the importance of taking care regarding administrative tasks when incorporating a business. In this case, HMRC raised a significant VAT assessment as a result of what appears to be a genuine administrative oversight of changing the name on the lease from Mr Latifi in his personal capacity, to SSO, the new incorporated business. Incorporating a business can have various VAT implications and we would recommend seeking professional advice.  Constable VAT will be happy to assist with any incorporation related queries. The case also acts as a reminder that it is important that taxpayers hold all the evidence required to support an entitlement to reclaim VAT incurred.

Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.