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HMRC wins the battle of Pirate Island

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22nd Feb 2017
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Marie Stein explains how the taxpayer could have avoided walking the plank, in a VAT dispute which hinged on timing of planning permission.

Private Island

It doesn't matter how old you are, most of us would love to have our very own island. The case of The Master Wishmaker Limited [TC05624] concerned a taxpayer who loved all things pirate and commissioned his own ‘Pirate Island’, including a dwelling, for his personal recreational use.

The development - known as Challis Island - involved the creation of five structures on a discreet piece of land, next to a lake. It depicts an abandoned 18th century colonial island with run down Georgian-style buildings. Most of the construction work was liable to the standard rate of VAT, but the developer believed that the zero-rate should apply to the construction of the dwelling known as Coffer Cabin.

Is Coffer Cabin a dwelling?

The issue at the heart of the dispute was whether or not Coffer Cabin was "designed as a dwelling" for the purposes of VAT Act 1994, Schedule 8, Group 5. If the cabin fell within item two of this group, the construction services should be zero-rated. If the cabin was not designed as “a dwelling or number of dwellings..." the construction services should be standard rated.

What is "designed as a dwelling"?

To fall within the provisions of Group 5 as "designed as a dwelling...", the property has to meet four specific criteria set out in Note (2) to the group:

  1. the dwelling consists of self-contained living accommodation
  2. there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
  3. the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision
  4. statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent

HMRC's view was that the property did not meet either Note (2)(c) or (d), so the construction services did not qualify for the zero-rate. The tribunal agreed that the construction of the property did not meet the planning requirements in Note (2)(d) and that the construction was therefore liable to the standard rate.

What was the problem?

The reason for the tribunal's decision was all to do with the timing of the planning permission. There were two separate planning applications; the first in September 2013 which was later withdrawn; the second in November 2013, by which time the work was finished.

Retrospective planning permission was granted in February 2014. However the tribunal agreed with HMRC's contention that the wording of Note (2)(d) "when statutory planning consent has been granted... and its construction or conversion has been carried out in accordance with that consent", means that the planning consent should have been granted before the supply of construction services was made; which normally means before the work is carried out. It is difficult to find any good reason to disagree with the tribunal's decision.

However, even if the tribunal had agreed with the taxpayer on Note (2)(d), it seems unlikely that the tribunal would have agreed when it came to Note (2)(c), which deals with the separate use and/or disposal of the property. The ruling included some very interesting observations about this issue which seem to support HMRC's position.

Conclusion

The frustrating thing about this case is that with some advance planning and forethought, it is possible that the construction could have met the Note (2) criteria, and saved the client significant amounts of "pieces of eight".

Replies (2)

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By AndrewV12
27th Feb 2017 10:38

The Master Wishmaker Limited's approach was a bit inconsistent, but its not un-usual for planning permission dates to chop and change, as do plans and completion dates, sometimes it takes years to get planning permission in the first palce.

What was the problem?

The reason for the tribunal's decision was all to do with the timing of the planning permission. There were two separate planning applications; the first in September 2013 which was later withdrawn; the second in November 2013, by which time the work was finished.

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paddle steamer
By DJKL
28th Feb 2017 17:01

There can be other non tax unintended consequences with planning permissions and timing

We had a property that was (and held planning permission as) an existing bar/restaurant.

We applied for planning permission to convert to offices, this was granted.

Then a prospective tenant came along to take the unit as a bar/restaurant, however in interim the top of the structure had been demolished.

From a point of planning law the demolition , notwithstanding it was preparatory works to a further application to alter existing bar/restauarant, was deemed to be the commencement of the new office planning permission, accordingly the property was now, re planning use, an office.

The in progress planning application to retain use but merely alter/amend (change the bar restaurant) was now invalid as the property was now an office not a bar/restaurant, no tonw use as a bar/restaurant needed a change of use back.

Accordingly we then required to make application for change of use from office (albeit not actually built or existing) to bar /restaurant (the physical building that then existed (minus top floor))

So, the moral, when two planning uses exist at the same time (existing and new) works on property will be deemed a commencement on the new permission irrespective of intent. (Albeit these days commencement notices do reduce the risk of inadvertent change of use)

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