Constable VAT Focus 2 December 2016


Autumn Statement

The Chancellor, Philip Hammond, delivered the Autumn Statement 2016 on 23 November 2016. The following VAT announcements were made:

  • HMRC’s intention to conduct a consultation on VAT grouping.
  • Digitalisation of the Retail Export Scheme.
  • Intention to tackle the exploitation of the VAT relief on adapted cars for wheelchair users.
  • Flat Rate Scheme (FRS): new flat rate introduced of 16.5% for businesses with limited costs. This will take effect from 1 April 2017. Businesses already using FRS or joining FRS will need to consider whether they are a limited cost trader. A limited cost trader is defined as one whose expenditure on goods is either less than 2% of their VAT inclusive turnover or expenditure on goods is greater than 2% of VAT inclusive turnover but less than £1,000 in one year.
  • Updating Avoidance Disclosure Regime, as announced in the Budget earlier this year.
  • Introduction of a fixed penalty of 30% for participating in VAT fraud if the participant knew or should have known.
  • As announced in the Budget, the implementation of the Fulfilment House Due Diligence Scheme.


First Tier Tribunal

Input tax recovery – application of CJEU judgment in Sveda

Durham Cathedral (the appellant) carries on business activities (gift shop and café) and non-business activities (it does not charge for general admission to the cathedral). The issue before the Tribunal was whether VAT incurred on repairs to and maintenance of a bridge could be recovered. The bridge provides access to the cathedral and is an attraction itself. HMRC’s argument was that the distance between the cathedral and the bridge was too great for there to be a sufficient and direct link between the repair costs and the appellant’s business activities.

The Tribunal found that not everyone using the bridge will visit the cathedral, gift shop or café (for example, dog walkers and runners). There are other means of access to the cathedral.

The appellant relied on the judgment of the Court of Justice of the European Union (CJEU) in Sveda. In that case the CJEU found that there can be a direct and immediate link between expenditure incurred in relation to the construction of a grant funded recreational path (which will be free to access) and the business activities of Sveda (café, for example) because the path, although free to access, attracted visitors to use the café and other facilities.

The FTT rejected HMRC’s submission that the bridge was ‘too far’ from the appellant’s activities. Influenced by Sveda, the FTT was of the view that the costs of maintenance and repair to the bridge are capable of being linked to all of the appellant’s activities, business and non-business. The appeal was allowed.

Constable VAT comment: the Sveda case indicated that charities and not for profit bodies that allowed free entry to buildings and attractions may still achieve full input tax recovery. This has yet to be tested before the UK Tax Tribunals as this case did not concern full input tax recovery. However, the FTT heavily quoted the Sveda case in this decision indicating it is good case law.

Anti-avoidance, option to tax and the capital goods scheme – whether the expenditure on acquisition and conversion of a property was a capital item

Water Property Limited (WPL) acquired a property with planning permission to convert the ground floor into a nursery and the upper floor into residential flats for £210k plus VAT. WPL opted to tax the property. It granted a lease to an associated business for the ground floor at a market rent.

WPL entered into two building contracts with the same firm. The first contract was for alterations to form the nursery and the second to form three residential flats. The value of the nursery building contract was £209k plus VAT and the value of the residential building contract was £161k plus VAT. Both contracts had the same start date and anticipated completion date. WPL claimed VAT incurred in relation to the nursery part of the acquisition of the property and the nursery building works. HMRC denied this VAT claim stating that anti-avoidance provisions, relating to capital items, applied. The issue before the FTT was whether the acquisition and conversion of the property was a capital item (expenditure exceeding £250k plus VAT) therefore preventing WPL’s option to tax from taking effect. HMRC’s argument was that works undertaken at a single property were part of a single indivisible project.

The FTT expressed surprise that this case was before the Tribunal. WPL had taken professional advice and followed the guidance in HMRC’s VAT Notice relating to the phasing of developments. The FTT took account of the separation in time of the acquisition and the commencement of the building works, the uncertainties as to the availability of finance and therefore whether the works would be carried out. It follows that there is not a capital item (the acquisition and building contracts are separate and all fall below £250k) therefore the option to tax is valid and WPL are able to recover the VAT incurred in relation to the ground floor. The appeal was allowed.

Constable VAT comment: this case emphasises that acquisition and phased refurbishments may be considered separately when determining whether there is a capital item. However, the anti-avoidance provision in relation to the option to tax and connected parties is complex and we would recommend professional advice is taken where there is any uncertainty, given the large sums involved.