CVC Blog: Could the case of Iberdrola impact the VAT recovery on planning gain agreements in the UK?

The Advocate General (AG) has given their opinion in the Bulgarian case of ‘Iberdrola Inmobiliaria Real Estate Investments’ EOOD (“Iberdrola”) (C-132/16) which could greatly impact property developers and housebuilders in the UK who enter into planning gain agreements with local planning authorities.

Iberdrola constructed a holiday village, which it intended to use to make taxable business supplies. Iberdrola needed to connect the site to the existing municipal waste-water pump station, which required extensive renovation. Iberdrola agreed, as part of the planning consent, to repair and upgrade the pump station for the local authority and instructed a building contractor to carry out the work.

Iberdrola recovered the VAT incurred on the cost of repair and improvement of the pump station. This was denied by the tax authority on the basis that the VAT was not incurred by the developer for purpose of its business.

The AG found that European legislation should be interpreted to the effect that it does not permit a business to deduct input tax incurred on services, which are supplied free of charge directly to a third party for its own purposes, even if the business is motivated by business reasons. Whilst it was accepted that there was some benefit to Iberdrola in incurring the costs, the supply by the building contractor was to the local authority. As such, Iberdrola would not be entitled to recover the VAT incurred on the work to the pump station.

This appears to contradict HMRC’s Public Notice 742: Land & Property, which states at Section 8.4:


8.4       Planning gain agreements

As a developer you may provide many other types of goods and services free, or for a purely nominal charge, to the local or other authority under section 106 of the Town and Country Planning Act 1990 or other similar agreements. These agreements are sometimes described as ‘planning gain agreements’.

Such goods and services may include buildings such as community centres or schools, amenity land or civil engineering works. Alternatively, they may be in the form of services such as an agreement to construct something on land already owned by the authority or a third party. Any such provision of goods or services is not a supply for a consideration to the local or other authority, or to the third party. Consequently, no VAT is chargeable by you on the handing over of the land or building or the completion of the works. However, the input tax you incur is attributable to your supplies of land and buildings on the development for which the planning permission was given.


It is expected that the CJEU will decide on the case later this year. While the AG’s opinion provides an indication of the judgement of the CJEU it is entirely possible that the CJEU will not follow the AG’s opinion.  A recent White Paper issued by the Government has set out how the UK will legislate for a future outside the EU. It is proposed that historic CJEU case law will be given the same binding, or precedent, status in UK courts as decisions of the UK Supreme Court. Therefore, although the UK is in the process of leaving the EU, it is likely the judgement by the CJEU will impact the developers and builders in the UK.

CVC will continue to follow the progress of this case and will update this summary when the final judgment is handed down.

Update: The CJEU has now found that the works to the station were essential for Iberdrola to complete the project and, in the absence of such work, Iberdrola would not have been able to carry out its economic activity. Therefore, demonstrating a direct and immediate link between the VAT incurred on the pump station and the taxable activity of Iberdrola where their cost is included in the price of the transactions. See our full comment in our VAT Focus 21 September 2017.