Welcome to the second 2020 edition of the Constable VAT Land & Property Focus. This newsletter is intended for readers with an interest in the land and property sector and provides a summary of recent updates and significant judgments from the Tribunals and Courts which may be relevant to you or your business.
DOMESTIC REVERSE CHARGE
The domestic reverse charge for construction services was due to be implemented on 1 October 2019. However, in September 2019, HMRC announced that this would be delayed for 12 months for further consultation following concerns which had been expressed by industry representatives that some businesses in the construction sector were not ready to implement the procedure by this date.
As a result of the COVID-19 pandemic, HMRC has again delayed the introduction of the domestic reverse charge for construction services until 1 March 2021. Whilst there is still some time, it is very unlikely that HMRC will extend this deadline again, so it is vital that your business is ready before March. If you are unfamiliar with the domestic reverse charge you can read more in our blog. However, if you are not yet prepared for the introduction, call Constable VAT and we will be happy to assist.
A special VAT Refund Scheme allows DIY housebuilders and people converting non-residential buildings into dwellings to reclaim VAT incurred on construction or conversion costs. This scheme is available when the building will be used for a non-business purpose. Constable VAT can advise on alternative options where a building is intended for business use.
This blog considers a recent trend in Tribunal cases where HMRC is refusing claims on the basis that they are “late”. We have been able to assist many DIY builders who have had claims rejected and can help by drafting letters to HMRC and appealing decisions to Tribunal. In the recent case of Andrew Fuller, our client was successful in representing himself at Tribunal with assistance from Constable VAT.
OPTION TO TAX
HMRC has revised its temporary change to the time limit for notifying an option to tax. Taxpayers now have 90 days to notify HMRC. This measure applies to decisions to opt made between 15 February 2020 and 31 October 2020.
PARTIAL EXEMPTION FRAMEWORKS
The framework for Housing Association partial exemption special methods has been updated.
Upper Tier Tribunal
This appeal by Moulsdale Properties (MP) concerned the application of the anti-avoidance provisions relating to the option to tax. MP owned a property which had been a Capital Goods Scheme (CGS) item when purchased but which, at the time of the relevant transaction, was no longer within the scheme (10 years had elapsed since the property first entered the scheme). An option to tax was made over the property by MP in May 2001 and it was subsequently leased to Optical Express (Wakefield) Limited (OEWL) in September 2001. OEWL was “connected” with MP for the purposes of the anti-avoidance provisions.
MP treated the lease as taxable until a VAT visit in 2007. OEWL was connected to MP and made mostly VAT exempt supplies. As a result, because the property was a capital item in the hands of MP, anti-avoidance provisions rendered the option to tax ineffective. MP then submitted a claim for overpaid output tax in relation to this lease and treated subsequent rent as VAT exempt.
In 2014 MP sold the property to CSPV (a special purpose vehicle established to hold property) OEWL remained in occupation. MP treated this disposal as exempt from VAT as it believed that the anti-avoidance provisions were still applicable. The property would be a capital item in the hands of the new purchaser (if VAT was charged) and was occupied for exempt purposes by OEWL. HMRC argued that the disposal should have attracted VAT.
A circularity arises on a key point of VAT law. Where land is opted, its disposal attracts VAT unless the option is disapplied. The option is disapplied if the developer of the land (MP) makes a grant of the opted building, it will become a CGS item in the hands of the purchaser and it will be occupied other than for mainly taxable purposes. When the option is disapplied in this way, no VAT is charged on the disposal to the purchaser which means that the building does not enter the CGS for the purchaser. Thus the circularity arises; as the item is not entering the CGS because the option is disapplied, the anti-avoidance provisions do not apply meaning that the option to tax is effective and the supply is taxable. As has been stated in previous case law, “The circularity is to be deplored”.
MP argued that the circularity can be resolved by only considering the intention of the grantor once, at the point of actually considering the disapplication test. Taking this approach, at the point it was considering the test, MP anticipated that it was selling land which was subject to the option to tax which it therefore expected to become a capital item in the hands of CSPV and would be occupied as exempt land by OEWL. The anti-avoidance provisions would bite so the transaction should be exempt from VAT owing to the disapplication of the option to tax.
HMRC argued that this was incorrect and reiterated its argument from the FTT that the test was not whether the transferred building would be within the CGS of the purchaser, but that it should be asked whether the transferor intends or expects that it will be. As MP did not ultimately intend for the disposal to create a capital item for CSPV, the option to tax would not be disapplied, rendering the transaction taxable.
The Tribunal held in favour of HMRC, commenting that the consideration process regarding the disapplication of the option to tax should not stop at the moment that the taxpayer considered the transaction to be exempt. It observed that if this were the case, it would mean that in cases where the sale price of the land and buildings was over £250,000 and the relevant person occupying it met the “exempt land test” there would be no charge to tax. This, it was noted, would create an invitation for tax avoidance.
Constable Comment: This is a complex area of VAT law which has continued to create difficulties for taxpayers. This case demonstrates that the anti-avoidance provisions regarding the option to tax are unclear on some fundamental points. Equally it shows that the anti-avoidance provisions are not limited to situations where avoidance is a motive. Before undertaking any high value property transaction, it is essential to seek professional advice.
First Tier Tribunal
This appeal by Landlinx considered the correct VAT liability of the release of an option to purchase land. HMRC, despite its published guidance and the wording of UK law, argued that such a surrender constitutes a taxable supply of services, not an exempt supply of land. The taxpayer argued that the law, and HMRC’s guidance, were clear on the matter in stating that transactions involving options over property are exempt from VAT.
In 2015, Landlinx signed an option agreement as the buyer relating to Loxwood Nurseries, an area of land in West Sussex. The property was not opted to tax by the seller. The option agreement was entered into with a view to obtaining planning permission. Such permission was received and subsequently the parties agreed to release the obligations under the agreement for a payment of £1,425,000 made by the seller to Landlinx. It treated the receipt of this income as exempt from VAT. HMRC assessed for £237,500 output VAT (treating the amount received as inclusive of VAT) on the grounds that the income was taxable consideration for the surrender of the option. HMRC, rather surprisingly, argued that this constitutes a supply of services.
The Tribunal considered the relevant European law which the UK law seeks to enact. The VAT Directive exempts from VAT the supply of buildings and parts thereof, and the land on which buildings stand. This is enshrined in UK law at Schedule 9 VATA 1994, which exempts “The grant of any interest in or right over land, or of any licence to occupy…” The notes to this clarify that ““Grant” includes an assignment or surrender and the supply made by the person to whom an interest is surrendered when there is a reverse surrender.
The taxpayer had relied on UK law and both HMRC’s Guidance Manuals and Public Notice 742, all of which dictate that the supply of an option over land is exempt from VAT.
HMRC argued that the relevant EU law only exempts from VAT supplies of goods i.e. the land itself, and not derivative interests in that land (services). In this context, a supply of goods means the transfer of the right to dispose of the property. Therefore, the payment in relation to the surrender of an option should be treated as a taxable supply of services as the right to dispose of the property does not change hands on the surrender.
The Tribunal observed that, if HMRC were correct, the outcome would be peculiar – two economically identical transactions would be taxed in different ways. The Tribunal noted that this was not the intention of the EU law and, in any event, such an outcome would infringe the EU principle of fiscal neutrality. It also noted that the EU law and UK law have existed alongside each other, without challenge, for 42 years. It concluded that based on; EU law, UK law, HMRC Public Notices and its Internal Guidance, Landlinx had every reason to believe that the grant and surrender of the land was exempt from VAT.
The Tribunal held in favour of Landlinx, concluding that the surrender of the option was exempt from VAT.
Constable Comment: The Tribunal commented that the view adopted by the taxpayer was correct and should be axiomatic for most VAT practitioners. Interestingly, both HMRC and an opinion given by the AG suggested that the EU provisions only apply to goods and not services. As the Tribunal noted, there was no reasoning underlying this idea and, in its view, the EU law comprehends both supplies which comprise the transferor’s entire interest in the land and buildings but also the transfer of a lesser or derivative interest in the land and buildings i.e.an option. It will be interesting to see if HMRC appeal this decision further and risk the Upper Tier Tribunal setting a binding precedent that land options are exempt from UK VAT.
DIY Housebuilders Scheme recent case law
This case concerned a decision by HMRC to reject David Stewart’s DIY Housebuilder VAT reclaim. Mr Stewart had attained planning permission to convert an old workshop in his garden into a dwelling for his disabled wife which would be suitable for her to manage with her disabilities.
The planning permission granted was for “Alterations and extensions including change of use from workshop to dwelling house”. Mr Stewart engaged an engineer to carry out the work but was advised that the workshop was structurally unsound and should be demolished and rebuilt. The old building was demolished and a new building, which complied with the planning permission, was built on new foundations.
A certificate of completion was issued on 21 August 2018 and a claim for repayment of VAT was received by HMRC on 30 August 2018; the claim was submitted within the three-month time limit after the issue of the certificate of completion. HMRC rejected this claim on the grounds that, for a valid DIY Housebuilder claim to be refunded, the applicant must have constructed a dwelling in line with the planning permission extant at the time of completion. As Mr Stewart did not have planning permission to construct a new dwelling, he did not meet this criterion. Mr Stewart argued that HMRC misunderstood the rules of the scheme and stressed that a completion certificate was received for both sets of work; the work as per the planning permission and the additional demolition and reconstruction work.
The Tribunal accepted that a new dwelling had been constructed and that Mr Stewart had received a completion certificate for the completion of the new property. However, it was also observed that appropriate planning permission was never sought for the construction of a new dwelling. Therefore, the Tribunal agreed with HMRC and dismissed Mr Stewart’s appeal.
Constable Comment: The DIY Housebuilder scheme is often before the Tribunals at the moment, usually in relation to the three-month time limit to submit a claim after the completion of the building. This case related instead to the interpretation of the rules of the scheme. Despite having obtained planning permission, built a new dwelling and received a certificate of completion, Mr Stewart was not entitled to a VAT refund as the planning permission received was not for the construction of a new dwelling.
This case concerned two brothers (Stephen and Paul) who had inherited a plot of land and received planning permission in 2010 to build two properties. The issue at hand is the three-month time limit for submitting a claim for repayment of input VAT which applies to the DIY Housebuilder Scheme, an issue which is increasingly common in the First Tier Tribunal.
Between 2010 and 2012, various purchases were made by both brothers in order to carry out the construction work. Between December 2012 and March 2013, both brothers had moved into their uncompleted properties. At this point, in Paul’s house, three out of five bedrooms were functional and one of the four bathrooms was functional. Stephen’s was slightly further along but was still not completed in accordance with the plans.
Works continued to the properties after the brothers had moved in and a completion certificate was subsequently requested from the local Council. When the Council visited the properties, it would not issue such a certificate until further work was carried out and safety certificates were obtained for heaters and boilers. The brothers carried out the necessary work and sent the Council the safety certificates on 6 December 2017, and received a completion certificate dated 15 January 2018. Two claims were submitted, one for each property, on 28 February 2018. HMRC denied the claims on the grounds that they were out of time and sought to argue that the properties had been completed when they were “habitable, safe and hygienic”, following the ruling in Purdue.
The brothers argued against this point and sought to rely on other case law which indicates that the completion certificate being issued triggers the commencement of the three-month time limit to submit a claim such as Farquharson and Dunbar. It was also submitted that HMRC’s Guidance treats the time limit as running from the date of the document issued being used as evidence of completion.
The Tribunal observed that HMRC’s Guidance does not have the force of law and should not be relied upon. It was also noted that HMRC’s Guidance is incorrect. Agreeing with the brothers, the Tribunal concluded that the properties were not completed until December 2017 when the works had been sufficiently completed to obtain the certificate of completion. Therefore, the time limit ran from a date in December 2017 – even if it was 1st December, the claims would have been within the time limit. The Tribunal held in favour of the taxpayers.
Constable Comment: The three-month time limit is an issue which is in the Tribunal frequently with HMRC often seeking to argue that a building is complete when habitable. There is a frustrating lack of clarity around this point; HMRC’s guidance is misleading and there is case law to support both the taxpayer’s and HMRC’s position in this case but none of it is binding. At the moment, we seem to be in a situation in which HMRC will happily throw taxpayer’s money at contesting refunds which look completely legitimate when considering the purpose of the tax and the relief for housebuilders.
Taxpayers are being forced to endure the stress and costs of what is rapidly becoming a lottery in terms of what any given Tribunal may decide. This must be viewed as an entirely unsatisfactory situation and, in our view, HMRC needs to grip this problem and also accept that the time limit should not be used to deny legitimate claims, bearing in mind cases like this will often refuse claims because the completion certificate has not been issued, creating a bizarre “Catch 22” situation.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.