Welcome to the first 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.
Businesses now have until 1 October 2020 to make sure that they are ready for the introduction of the domestic reverse charge for construction services. 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 October. 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.
CASE REVIEW
1. Deducting VAT Incurred on Fulfilling a Statutory Obligation of The Vendor in A Property Transaction
This case concerned the right to deduct VAT incurred by the purchaser of some land in relation to registering that land in the Romanian Land Registry prior to its transfer by the vendor.
The appellant, Amărăşti Land Investment (ALI), carried out agricultural activities and wished to purchase land to fulfil its purposes. The purchase of some of that land was affected by way of two stage process consisting of, primarily, a bilateral promise to sell whereby ALI would acquire a claim to ownership of the land and, secondarily, upon completion of the administrative formalities. The contract would then be signed by both parties.
Romanian law requires that contracts for the sale of land take the form of authenticated instruments, and in order for this to be the case, the land in question must be registered at the Romanian Land Registry.
Despite being the purchaser, ALI incurred costs from a land-registration company for the purposes of the first registration of the land in the transaction; land registration being a statutory obligation of the vendor. It was agreed between ALI and the vendor that this was acceptable and that the vendor would reimburse ALI the costs incurred to register the land at a rate of €750 per hectare. The costs were not re-invoiced by ALI to the vendor and the full price of the land excluded the value of the land registration related expenses.
ALI deducted the VAT incurred on the land registration fees but was assessed by the Romanian tax authority on the grounds that each payment of €750 represented services supplied by ALI to the vendor without invoicing the value to the vendor or collecting the relevant VAT. EU law dictates that in this situation, where a party to a transaction acting in his own name but on behalf of another person takes part in a supply of services as an intermediary, he is deemed to have received and subsequently supplied those services himself. ALI disagreed with this position and argued that the costs incurred on land registration were investment related costs incurred for the purposes of carrying out its taxable transactions and, therefore, that it was entitled to deduct the VAT.
The Court held that the EU law does not preclude parties to a contract for exchange of land from agreeing that the purchaser, being a taxable person, will incur costs on behalf of the vendor. However, it was held that the mere presence of such a clause is not conclusive on whether the purchaser will be entitled to deduct VAT incurred in relation to these costs. The Court went on to conclude that even if such an agreement exists between the two parties, the purchaser is still deemed to have received and supplied the services with VAT due on that supply.
Constable Comment: The matter will be referred back to the national Court to make an ultimate ruling on the deductibility of the VAT incurred by ALI. However, it appears from this judgment that ALI will be required to declare output VAT on supplies which it is deemed to have made to the vendor.
2. Reasonable Excuse: Westow Cricket Club
Westow Cricket Club (the Club) is a Community Amateur Sports Club (“CASC”) registered under section 58 of the Corporation Tax Act 2010 from October 2012. Although run on a not-for-profit basis, it is not a registered charity.
The Club is run by unpaid volunteers with a love for village cricket. The Club raised funds to build a pavilion and sports hall adjacent to the cricket ground. Prior to any building work starting, on 22 March 2012, the Club wrote to HMRC giving details about the Club and the building project and seeking guidance on the zero rating of supplies to the Club in the course of the construction of the pavilion and sports hall. HMRC’s response was not definitive and referred the Club to HMRC’s notice, but was read by the Club as indicating that zero-rating was appropriate and a certificate was issued to the contractors undertaking the work
This appeal concerned itself with the decision by HMRC to issue a penalty of £20, 937 to the club on 31 March 2015. The penalty arose from the decision to issue a zero-rating certificate to Atkinson Builders Ltd on 9 March 2013 in relation to supplies to the Club during the course of the construction of a new pavilion.
The only issue before the FTT was whether or not the Club could prove that it had a reasonable excuse for issuing the zero-rating certificate, it having been conceded that the Appellant ought not to have issued the zero-rating certificate.
The FTT concluded that there was not a reasonable excuse on two grounds:
- HMRC’s letter stated that it was not definitive advice and pointed the Club to consider further information.
- The zero-rating certificate is explicit and asks for confirmation that the building will be used “solely for…a relevant charitable purpose, namely by a charity”. The requirement is expressly set out and there is no other objectively reasonable interpretation that might be applied. The Club is not a charity.
The FTT also considered whether the penalty was disproportionate, but concluded it was not as it simply resulted in the Club paying a sum equal to the amount of VAT that was properly due.
Constable Comment: This is one of several cases that have been considered by the Tribunals on this point and, given HMRC’s response, it seems harsh that it was not held that the Club had a reasonable excuse. However, this does highlight the need to seek professional advice before issuing a zero-rating certificate as errors in this area can create significant VAT issues further down the line for charities.
3.Business or Non-Business: Zero-Rating Construction Costs
This appeal by Madinatul Uloom Al Islamiya (The College), is against a decision by HMRC that construction services received by The College did not qualify for VAT zero-rating.
This is an issue which has been in the Courts a great deal in recent years, with cases such as Longridge and Wakefield considering whether a charity is operating a business or conducting an “economic activity”. In this instance, The College operated a boy’s residential Islamic faith school where attendees are taught the national curriculum and Islamic Studies. The College is fee-paying and sets this fee by reference to other similar residential faith schools.
The College built a new multi-functional hall. It issued a certificate to the contractor confirming that the hall would be used for a relevant charitable purpose (RCP) insofar as it would be used for solely non-business purposes. Whilst the Tribunal considered several issues such as whether the hall was a building and, if so, whether it was an annexe, the point on which the case turned was the RCP point. There were comparisons with the Yeshivas Lubavitch judgment to be made in considering whether The College was operating an economic activity. In that case, it was held that the zero-rate could apply to a similar situation (our coverage here).
The College argued that its fees were donations. If a pupil’s parents/guardians could not afford to make a payment, generally the debt was not pursued where there were good reasons. HMRC disagreed with this analysis. The Commissioners argued that the money received by The College represented consideration for a supply of education and that it was not a donation. Merely failing to pursue a bad debt does not make it a donation. The Tribunal observed that, whilst The College did receive substantial donations from the religious community, these donations were distinct from the fees charged and that this was reflected in The College’s financial statements.
Considering that the fees charged are significant “in amount and in aggregate” and that the fees received make a significant contribution to the cost of providing the education, the Tribunal ruled that this hall was not constructed for a RCP and, therefore, that VAT was due on the construction costs.
Constable Comment: This case is yet another in a long string of business/non-business decisions relating to the construction of buildings. What has become clear throughout the last few years with all these judgments is that HMRC are particularly restrictive in accepting the applicability of the zero-rate for a building to be used for non-business purposes. Whilst the ruling in Wakefield re-opened the door to a contextual approach to deciding if an activity is “economic” in nature, it still appears a particularly grey area of the law.
4. Eynsham Cricket Club: Zero-rated Pavillion
This appeal related to whether the zero-rate of VAT was applicable to construction services supplied to Eynsham Cricket Club (ECC). ECC built a new pavilion after their old one burned down and issued a certificate to the contractor stating that the new pavilion would be used by a charity as a village hall or similar and, therefore, that the services between ECC and the contractor should be zero-rated for VAT. HMRC disagreed with this and assessed for the VAT owed on the supply to ECC.
The First Tier Tribunal had held in favour of HMRC on the grounds that ECC had not been established for purely charitable purposes. However, in response to ECC’s request to appeal, HMRC conceded that this was incorrect and, during a case review, the Upper Tier Tribunal reversed the decision so ECC was permitted to treat the construction expenses as zero-rated for VAT. The case then came before the Upper Tribunal formally, with ECC as the respondents.
In UK VAT law, where a new building is constructed for a charity and is to be used as a “village hall or similar” in providing social or recreational facilities for a local community, the construction costs can be zero-rated. HMRC believed that ECC was not a charity and could not benefit from the zero-rate as it was, in fact, a Community Amateur Sports Club (CASC). CASCs have their own tax benefits and are, in some regards, treated similarly to charities; however, they are not, in law, charities.
There was a lengthy consideration of the law in the Finance Act and the Charities Act around what constitutes a charity and whether a “Community Amateur Sports Club” could have been established for charitable purposes. None of this focussed around VAT law and was based on the interpretation of law of charities and sports clubs. The Tribunal concluded in favour of HMRC, that ECC was not established for purely charitable purposes.
This meant that the zero-rate did not apply to the construction costs and the assessment raised by HMRC to the contractor stood, ECC had to account for this VAT.
Constable Comment: Whilst this case ultimately considered law unrelated to VAT, there were some useful observations made by the Tribunal. An area of VAT law which often causes issues is charges made by a charity to the community for use of the newly constructed building. In this judgment, it was reiterated that the fact a person wishing to hire a building has to pay a fee does not preclude the building being seen as similar to a village hall. This is a particularly current area of the law, it would seem that HMRC have been targeting not-for-profit sports clubs constructing sports pavilions along with charities constructing relevant charitable purpose buildings. If your organisation intends to construct a building, and falls within either category, it is essential to seek professional advice to ensure the correct VAT treatment.
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.